DCIF 2022: Using behavioral finance concepts to improve DC plan participation, contribution rates

One of the simplest things DC plan sponsors can do to increase member participation rates is to increase their matching amount, Banerjee said, noting that several studies in his review of the plan literature DC pension plans around the world revealed that for every 10 percentage point increase in a plan sponsor match rate, there was an increase in participation rate of 2 to 6.3 percentage points.

Read: U.S. Employers Reinstate and Increase Matching Contributions for Defined Contribution Plans: Survey

Better employer matching can also play a big role in boosting plan member contribution rates, he said. A study by a DC plan sponsor found that when the company increased its match rate by two percentage points for unionized and managerial staff, employees increased their own contributions to take advantage of the new higher match. .

Referring to a study on organ donation, Banerjee demonstrated the value of adopting automatic enrollment in DC plans. One study compared countries with opt-in organ donation regimes – where citizens had to actively choose to be an organ donor – and those that automatically made every citizen an organ donor but allowed them to withdraw. In opt-in countries, organ donation rates were 28%, while opt-out countries recorded organ donation rates close to 100%.

The effect is similar with DC plans, he said, noting that one study found nearly 99% of plan members in auto-enrollment plans contributed to the plan in their first four years. years, while opt-in plans have reached about 71 percent. hundred.

While the trend among some auto-enrollment DC plan sponsors is to set the contribution rate lower to prevent plan members from opting out, Banerjee noted that studies have shown that a higher contribution rate is not correlated with plan members dropping out of the plan. at a higher rate.

“If you are concerned about the retirement income security of the people you employ, consider, if you are using defaults, setting those defaults higher and asking them to opt out rather than set them lower, because they will stay at that lower amount and that might not be enough for them to have a secure retirement.

Read: Automatic features of DC pension plans could benefit participants: ARSFS

He also suggested that plan sponsors pay close attention to their default investment options given the entrenched status quo bias of plan members. Plan participants perceive the default option as having the implicit approval of their employer, which can have a negative impact on employees’ retirement security if the fund is too conservative in nature.

Banerjee also warned against too many investment choices. His review of the literature found that one of the most common factors affecting take-up and contribution rates and plan participants’ asset allocation decisions is financial decision “overload”. Faced with many investment options to evaluate, plan participants are less likely to complete their enrollment in the plan. One study found that for every 10 additional funds on the platform in a CD repo, the take-up rate dropped by 1.5 to 2 percentage points.

He advocated adding a quick sign-up option to an automatic sign-up plan. Rather than forcing plan participants to choose their contribution rate and asset allocation, quick sign-up presents them with an ideal default fund and contribution rate and allows them to select yes or no, those who want more ‘options having the ability to investigate further. Plans with this option saw plan take-up rates increase by 10 to 20 percentage points, he said.

Learn more about DC Investment Forum 2022 coverage.

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