PLANSPONSOR - December 2017/January 2018 - 45

life stage can pay surprising dividends far
down the road.
" Any contributions they make today
can grow, tax-deferred [for decades],
and savings can significantly accumulate
over time, " Williams says. " I cannot
stress enough to Millennials the value of
utilizing workplace accounts for retirement
planning. They leave too much on
the table by not participating. "
Of course, not every Millennial
enters the work force plagued by excessive
student loan debt that prevents a
commitment to the retirement plan;
however, data show there may be other
challenges that weigh down that group's
retirement savings efforts. Notably, the
latest Allstate/National Journal Heartland
Monitor Poll found that 32% of younger
working Americans believe paying off
credit cards and any other debt is the best
use of their money right now.
And some further financial priorities
ranked above saving for retirement for
younger survey respondents. Twenty-one
percent said building an emergency liquid
savings fund is the best use of their money
today, while 15% selected " saving ahead for
major purchases such as a car " ; 14% chose
" saving to buy a home or paying off a mortgage " ;
and only 10% picked " investing in a
retirement account. "
One Potential Solution
So it is clear, broadly speaking, that
Millennials of all stripes, whether they
are just taking their first job or are already
solidly planted in their early career, can
benefit from focused retirement plan
design solutions aimed at boosting their
commitment to saving. One solution
to this challenge is to implement more
aggressive automatic enrollment at higher
default percentages. Even better would be
to tie this to ongoing automatic deferral
escalations and regular re-enrollments,
including for the newest and lowestearning
employees.
Higher default enrollment rates
will improve Millennials' retirement
outlook, says Shlomo Benartzi, Ph.D.,
Art by John Cuneo
UCLA Anderson School of Management
and senior academic adviser to the
Voya Behavioral Finance Institute for
Innovation. He suggests that all employers
wonder how to best serve this debt-laden
population.
Some plan sponsors, Benartzi says,
have the sense that it is best to take a
hands-off approach and allow the group
to define its own priorities, whether those
be paying down college debt, saving to
purchase a first home or buying a first
car. Others think it is important to get
early career Millennials enrolled in the
retirement savings plan, but they worry
about redirecting too much of their
new employees' paychecks and thereby
causing a preventable financial hardship;
they, therefore, set the automatic deferral
rate at a mere 2% or perhaps 3%. But if
successful retirement plan outcomes are
truly the goal, neither of these approaches
is satisfactory, Benartzi warns.
Studies about automatic enrollment
emphasize the importance of ensuring
" we are sending the right signals about
what is to be considered optimal behavior
once new employees are in the plan, "
Benartzi explains. " We now have the
empirical data showing that a 6% automatic
deferral or even higher works just
as well as 2% or 3% from the retention
perspective. Simply put, new employees
do not opt out due to more aggressive
automatic enrollment. "
One study Benartzi helped conduct
asked whether an 8%, or even 10%, automatic
deferral rate would work better for
long-term outcomes.
" We took 10,000 participants who
were directed to the Voya website and
were trying to enroll in a plan for the
first time-many of them naturally were
Millennials-and we suggested different
savings rates for different segments of
this group, " Benartzi recalls. " What we
found is that, by and large, people do not
run away, regardless of the enrollment
level we suggest. So we had very similar
rates of retention for 6%, 7%, 8%, 9% or
10% auto-enrollment. "
This was an amazing finding,
Benartzi says, and it showed that more
important than new workers' debt levels
or outside financial priorities are the
signals they receive from employers about
the importance and ease of saving for
retirement. There is a limit, of course;
researchers saw that once they implemented
an auto-enrollment rate at an 11%
salary deferral, there was a slight drop-off
in new participant retention.
" This is actually great news, because
it shows that there is a very broad spectrum
of savings rates that we can propose
and that newly enrolled workers will take
seriously, " Benartzi notes. " It is really up
to sponsors to take this initiative to help
those people who are newly enrolling
in their plans. They have the power to
promote plan success. "
Benartzi concludes with an intriguing
caveat: " As [sponsors increased] the default
rate beyond 7% and up to 8%, 9% or 10%,
we saw an increased rate of participants
engaging with the plan and lowering their
deferral rate to a percentage that they actually
liked, typically a percentage or two
below the default that was suggested. At
first blush this may seem like a negative
outcome, but we actually see it as a positive
sign of real engagement with the plan as a
direct result of these higher default rates. "
-John Manganaro
KEY POINTS
* The proportion of Millennials
in the work force has room for
significant growth.
* Only 10% of Millennials currently
in the work force consider
retirement planning a priority.
They have substantial student
loan debt and are concerned
with addressing short-term
financial debt rather than
saving for retirement.
* Millennials can benefit from
focused and aggressive
retirement plan design solutions.
PLANSPONSOR.com December 2017-January 2018 45
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