PLANADVISER - January/February 2018 - 21

beyond, " and she feels the side in favor of a new PPA can
ultimately win the day.
" When one projects the future of Social Security, Medicaid
and other entitlement programs, we simply do not have a
choice but to act now in a dramatic fashion to increase the
amount and consistency of individual savings, " Kahn says.
" None of this will be a slam-dunk in 2018, but I think what
Congressman Neal is doing here is an honest attempt to help
solve the retirement plan coverage gap, and, for that reason,
it could go a long way, even in today's political environment. "
Making It Work for Small Employers
According to Kahn, her team sees the Automatic Retirement
Plan Act as being " very thoughtful and workable. ... [T]he bill
provides additional tax credits for helping to defray the cost
of plan administration for the first five years. So you have,
really, an eight-year window to prove a business is viable
before having to fully commit to offering a plan-and then
for the employers who continue down this road, there's no
requirement whatsoever to make matching contributions.
But if they do, they get a tax credit for that as well. "
Kahn says the other main takeaway is the
boost to the open MEP discussion. " I really do
see open MEPs as the future-and not just
for small employers, as we are hearing about
today, " she says. " Farther down the road,
I think it's going to be midsize, and even
large, employers as well that are attracted to
utilizing the open MEP approach. I think that
employers of all sizes will see value in offshoring
the administration of the plan, the selection of the
recordkeeper, the selection of a fund menu and all the
other details that go along with being the fiduciary plan
sponsor. "
New Lessons of Behavioral Finance
It's not exactly rocket science to recognize that requiring
employers to offer 401(k) plans and encouraging higher
default enrollment rates will improve the U.S. retirement
outlook, says Shlomo Benartzi, Ph.D., UCLA Anderson
School of Management, and senior academic adviser to the
Voya Behavioral Finance Institute for Innovation. But it is
the honest truth, he says. It is also true that, left to their
own devices, many employers fail to craft retirement plans
that truly promote retirement readiness-including many
that have already adopted auto-enrollment.
Benartzi indicates that employers all naturally wonder
how to best serve their employee population with respect
to retirement planning. Some plan sponsors have the
sense that it is best to take a hands-off approach and allow
employees to define their own financial priorities, whether
that is paying down college debt, saving for a first home/car
purchase or saving for retirement. Others feel it is important
to get most, if not all, of their employees automatically
enrolled in a tax-qualified retirement savings plan, Benartzi
says, but they fear redirecting too much of new employees'
paychecks and thereby causing a financial hardship.
" And so the employer makes a compromise and sets the
automatic salary deferral rate at a mere 2% or perhaps 3%.
Both of these outlooks are quite common, but if successful
retirement plan outcomes are truly the goal, neither
approach is satisfactory, " Benartzi warns.
Based on his work and that of many respected colleagues,
Benartzi says the empirical evidence clearly shows the
importance of making it easy to start saving, and ensuring
that employers and governments send the right signals
about what is to be considered optimal retirement plan
behavior. In fact, his research supports the more aggressive
deferral rates proposed in the Automatic Retirement Plan
Act-and points to their potential to go even higher.
" The suggested default savings rate [since the PPA] has
been extremely low-but 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, "
Benartzi continues. " Simply put, new employees do not
opt out of the plan at greater [savings] levels due to more
aggressive automatic enrollment. They are looking for guidance
about the right way to participate. "
Significantly Higher Deferral Rates
One study Benartzi helped conduct asked whether
an 8%, or even a 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 says. " Then we
measured a few things, including, would they run
away at some point when the number we suggest got too
high? 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 finding, Benartzi says, shows that more important
than a newly enrolled worker's debt level or outside financial
priorities are the signals he receives from the employer
about the importance and ease of saving for retirement.
There is a limit, of course, and 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. Still the drop-off was not significant.
This " 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 and legislators to take this initiative to help those
people who are newly enrolling in their plans. They have the
power and knowledge to promote plan success. "
Benartzi concludes with one intriguing caveat: " As you
keep increasing the default rate beyond 7% and up to 8%,
9% or 10%, you see an increased rate of participants actually
engaging with the plan and lowering their deferral rate
to a percentage 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
planadviser.com january-february 2018 | 21
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PLANADVISER - January/February 2018

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