In the opinion of ERISA Risk Management Consultant Rick Unser, the traditional view of retirement planning needs to change. Plan sponsors may feel they are doing everything possible to help employees save: they offer a plan and they try get employees to join it. In many cases, a few employees save a lot – and most of them don’t. That’s when the old saying about horses and water takes hold.

After all, the last few decades have seen a massive shift toward self-reliance in benefits of all kinds, from health care to retirement. With a 401(k) plan, the employer provides the vehicle and the investment alternatives, and from there it’s up to the employee to save or not.

Surprise! It isn’t working. Not only are employees reluctant to take on what might seem like another job, they are hampered by the procrastination and inertia inherent in human nature. Even those employees who want to do tackle investment strategy on their own probably shouldn’t because they simply don’t understand finance well enough to do the best job.

Depending on which study one reads, participation rates in a workplace retirement plan among the American workforce range from one-third to three-fourths. Even when participation is high, the average savings rate is a paltry 5 or 6% of pay – not enough to generate an amount necessary for a secure retirement. That’s especially true considering expert recommendations that retirees accumulate $200,000 to pay for the cost of retirement health care expenses alone.

Readiness assessment starts the process

Recognizing the dismal state of retirement savings, Unser, of Lockton Financial Advisors, LLC wants to start a new dialogue, one that shifts from raw participation figures to retirement outcomes. On his website, www.erisariskmanagement.com, Lockton covers a series of ideas that, implemented properly, will get employees much further down the road to retirement security.

The first step is for the employer to understand the employee population’s current state of retirement readiness by conducting a retirement readiness assessment. The assessment is much more than benchmarking against other plans, he says. “A look at participation and deferral rates should not be the entire process. That really won’t help employers make great observations about what their plan can do differently to improve those numbers. It’s more important to focus on the outcomes, and what they will be as a result of current employee behaviors.

"We like to start with participation and deferral rates, then factor in social security, future appreciation on assets, future contributions, the amount of time left to accumulate assets. Then we make projections that tell the plan sponsor what percentage of income employees are on track to replace. That’s the key figure in the discussion.”

Unser takes it a step further, too. “We like to break the figures down into age groups,” he says. “In one case a client saw that employees in the 45-55 age bracket – those who should be most concerned about retirement savings – had abnormally low replacement ratios. The employer realized they had to change the shape of the conversation for those people; that’s the conversation we like to have.”

Plan design elements bolster savings

Once you understand how your overall population is doing (as well as subgroups within the population), you can use plan design elements to shore up those areas that are weak, Unser says. “There are a lot of tools available to plan sponsors to help encourage the readiness of their participants, many of them very simple. Over the last several years, we’ve seen plans getting away from the 6-month or 12-month waits to join the plan; now it may be immediate eligibility or a 30-day wait. Plan sponsors are realizing that it’s better to have more people in the plan and starting to defer. I think that trend will continue.”

“Other plan design elements include automatic enrollment and auto escalation. Some sponsors are uneasy about automatic enrollment. They are concerned about the cultural impact, the level of resistance or the legality of it, and they don’t have a clear understanding of how it can really help their employees,” Unser continues. Not only does he strenuously believe in the effectiveness of automatic features, he recommends jumping in with both feet.

“I’m a big believer that if you’re going to pursue automatic enrollment, you should roll it out in a way that will have a meaningful impact on retirement outcomes. Enroll them at 6% of pay, with 1% automatic increases until they reach 10%. They really need to be adding between 10% and 15% of their pay each year, between their own and their employer’s contributions, in order to accumulate enough for retirement. What we’ve seen is that the opt-out rates are very similar when you’re aggressive with the percentages as they are if you start low and stay low. Why not encourage as much saving as you can?”

Communications should be simple, targeted toward behavior change

“Once you’ve analyzed the strengths and weaknesses of your group, and you’ve looked at how you can use plan design to augment the strengths or fix the weaknesses, then you need to effectively communicate with employees,” Unser continues. “We want employers to focus on the behavior outcomes they’re looking for. Make sure that communication is specific to the various demographics of your workforce, and also geared around changing behaviors.”

For example, Unser favors using a Take Action card in employee meetings. “It’s very simple; it says that by checking this box and signing at the bottom, you are going to be enrolled in the plan at a 6% deferral rate and your money will be placed in a target date fund. It’s much more effective than telling people, ‘when you leave here, log onto the internet, put in this code, enter this password, follow these ten steps, and once you’re done you’ll be enrolled in the plan.’ People don’t want to go through a bunch of machinations just to join the plan.

"Everyone is busy, so make it easy for them. We suggest to our clients that they select three deferral rate options to put on the cards, say 4%, 6% and 10%. We find that 80% of employees will check the box in the middle, so making that option a strategic choice is important.”

Unser recommends that plan sponsors take a fresh look at their employer contributions. “Not everyone is making employer contributions, but if you are, we recommend using them strategically,” he says. “Let’s say an employer gives a 100% match on the first 2% of pay contributed by the employee. Most employees have heard the advice about contributing up to the amount of the match. Sometimes the message is to take any extra money and contribute it outside the plan. But we know that, typically, people don’t get around to it.

"When you have such a low hurdle to get the match, the vast majority of the population only meets that hurdle, and that won’t result in enough accumulation. But if you match 50% on the first 4% of pay, or 25% on the first 8%, it won’t change what the company is paying out of pocket but it might produce better results for your employees.

“What I’m trying to do is to move the conversation away from the areas that are not going to have as big of an impact on retirement outcomes, and move it toward the things that will have a big impact,” Unser says. “Of course you need to have a good foundation of fiduciary governance, of quality investments, a good recordkeeping partner that is offering services at competitive fees. But those things alone are not going to help employees get to a point where they have the financial confidence to transition into retirement.” So start talking.