Behavioral Science Jujitsu Improves Retirement Plan Participant Engagement

Employee engagement with workplace defined contribution (DC) retirement plans grew in 2015 by every metric Bank of America Merrill Lynch measures.

According to its Plan Wellness Scorecard for the period ending December 31, 2015, total contributions increased 14% from the year before, while the number of employees with balances grew 16% during the same period.

During the year, most employees (84%) who changed their contribution rates increased them. The number of employees who started contributing or increased their contributions to their savings grew 82% from 2012 to 2015, indicating that employees are taking advantage of savings opportunities within their plans as they look to save more and prepare for retirement.

“We continue to see strategies we can employ with plan sponsors that positively impact behavior of employees. Simply changing information delivered to participants can impact behavior,” Gary DeMaio, head of defined contribution product for Bank of America Merrill Lynch in Hopewell, New Jersey, tells PLANSPONSOR. “If you simplify their experience and make it easier for employees to engage and understand, they will almost always make a positive change.”

As an example, DeMaio explained that with Bank of America Merrill Lynch’s Express Enrollment, employers select three contribution rates from which employees can choose. Employers can also determine the order in which the rates are displayed. The order can have a major impact on employees’ decisions, which in turn may affect their retirement outcomes. More employees (43%) choose the first rate displayed than the second or third rate, even if the first rate is highest. “There are little things plan sponsors can do to help participants make the right decisions,” DeMaio notes.

The survey also found automatic enrollment plans with higher default contribution rates are seeing higher rates of participation as well. The average participation rate for plans with a 3% default contribution rate was 78%, compared to 83% and 88% for plans with 6% and 10% default contribution rates, respectively.

“We were really pleased by this finding. Employers should understand that if they increase the default [contribution rate], it doesn’t have a meaningful impact on opt-out rates,” DeMaio says. “The finding validates that plans are defaulting too low and participants recognize the need to save more.”

According to the Scorecard, growth in contributions and participation is taking place in both pre-tax and Roth accounts.

In 2015, Advice Access, an investment advisory service, added the Roth 401(k) to its suite of personalized, unbiased recommendations. This enhancement helped drive the growth in Roth usage during the year. The number of contributors to Roth accounts increased 38%, and total contributions increased 32%. More than half (52%) of Roth contributors also made pre-tax contributions.

Advice Access offers savings recommendations and investment advice, including a managed account feature and asset allocation with either one-time or periodic rebalancing. The number of employees using the Advice Access service increased 14% in 2015. In addition, 19% of employees using Advice Access are taking it one step further—providing additional information about their finances that allows them to receive even more customized recommendations.

“There are a few contributing factors to growth in managed account use,” according to DeMaio. “First, plan sponsors continue to recognize the value of providing advice and guidance to employees; it’s a great way to get employees on the right track.”

But, he points again to a change in strategy that contributed to the growth in managed account use. “We changed participants’ online experience to bring each employee’s retirement income projection to the home page to make it easy for them to see their retirement readiness and take action. Since then, we have seen a 106% increase in the number of participants enrolling in managed accounts.”

The Scorecard also found enrollment in health savings accounts (HSAs) continues to grow year over year. In 2015, the number of HSA accounts increased 47%, with total assets under management increasing 47% and average cash balances increasing 42%.

“We have begun to address HSA growth in light of the role it can have to help employees save for retirement, as well as existing health care costs,” DeMaio says. “As high-deductible health plans become more common, HSAs are becoming more common. It’s a unique solution for participants to save for retirement health care costs, and we try to give guidance to participants about how to best utilize HSAs’ advantages.”

He concludes that the key takeaway from the Scorecard results for plan sponsors is that through a combination of strategies, they can really change outcomes and impact participant behavior in a positive manner. “It’s a combination of plan design, such as auto features; education and communication, both targeted and face-to-face meetings where sponsors can answer employee questions; and tools employees can use to help them make the right choices.”

The Scorecard can be found here.