In our last article, “Spending Behavior May Be Key to Retirement Savings: Research Results,” we discussed the findings from a research project undertaken by J.P. Morgan Asset Management (JPMAM) and the Employee Benefit Research Institute (EBRI). JPMAM published the results of their research in a June 3, 2020 paper entitled, “The 3% difference: What leads to higher retirement savings rates?” The research is groundbreaking in that it finally provides better insight into why some people save more than others. The following will offer commentaries on the implications of the research findings for plan sponsors.

First, a quick summary of the research. The research population was broken into three saver profiles: Low Savers, Middle Savers and High Savers. For characteristics of each, refer to our last article. Interestingly, it turns out that meaningful differences in spending behavior—not salary differentials (i.e. the median salary levels for Low and Middle savers is substantially the same)—was suggested to account for the difference in median savings rates among the Low and Middle Savers.

The research also found that the primary savings vehicle for most households is their 401(k) plan; consequently, plan sponsors may be able to play an important role in helping participants improve savings habits.

Further research on the factors impacting spending behavior would be beneficial. However, the current research available appears to be sufficient when it comes to guiding plan sponsors on how to facilitate better outcomes for plan participants. Three plan design features that plan sponsors can take advantage of come readily to mind:

1. Optimizing Auto Enrollment Features: Based on Vanguard’s most recent annual report on the plans they provide recordkeeping services to, “How America Saves 2020,” only 50% of plans utilize automatic enrollment. While the number of plans utilizing auto enrollment has increased over time, there is obviously still plenty of opportunity for further growth. Of the plans with automatic enrollment, 55% use a default contribution rate of 4% or higher. This rate has seen an increase when compared to 28% in 2010. However, 45% of plans are still left with a relatively low default rate (e.g. 3% is common). There are two problems with utilizing a low default rate. First, participants may believe that the default rate will be sufficient for them to accumulate an adequate retirement savings. After all, it is the rate selected by the plan sponsor–why would a rate that wasn’t sufficient have been selected? Second, participants who otherwise would have selected a higher savings rate just go along with the default rate, thus ending up with less savings over time.

To encourage increased participant savings, plan sponsors who aren’t utilizing automatic enrollment should consider adding it. This will help get employees in the plan to begin saving. For plans already utilizing this feature, increasing the automatic default rate should be considered, especially for those plans with a contribution rate less than 5%. Additionally, plans could do periodic “sweeps,” whereby employees not contributing—or already contributing, but at a rate lower than the default rate—could be swept into the plan or have their contribution rate increased to the default rate. Remember, the affected employees always have the right to opt out; in other words, they are not being forced to accept the change. These initiatives will result in higher participation rates, as well as increased savings rates.

2. Auto Escalation Features: Based on Vanguard’s report, approximately two-thirds of plans with automatic enrollment utilize automatic escalation. As most know by now, auto escalation periodically increases a participant’s contribution rate (e.g. a 1% increase every year or timed to salary increases, subject to the right of the participant to opt out). The SECURE Act increased the cap from 10% to 15% on these auto increases, effective in 2020. By taking advantage of this feature, plan sponsors may find that it helps narrow the spread between Low and Middle Savers.

3. Financial Wellness Features: Financial wellness programs for 401(k) plans are still in the early stages of development and deployment. The key objective of these programs is to provide assistance to employees in making better financial decisions and, in so doing, helping them achieve financial wellness. The Retirement Advisor Council defines the goal of financial wellness programs as follows:

Support the overall financial health of employees by providing tools and resources to help employees manage their current finances, prepare for financial shocks and plan for their retirement and financial future.

The better programs achieve this goal by providing services such as financial education, budgeting assistance, retirement readiness assessment and individual coaching. They also offer tools for goal tracking, decision analysis and performance assessment. This seems to be a good mechanism to help participants optimize their saving and spending. For example, features of these programs may improve decision making with large purchases (think housing, cars and education), retirement saving and financial matters in general. Methods of providing this assistance include targeted education, as well as “just-in-time” advice, whether digital or live.

Plan sponsors play an important role in facilitating the likelihood of a successful retirement outcome for plan participants. The findings published by JPMAM bring to light the probable importance of spending behavior in saving for retirement. Plan sponsors can strive to close the gap between Low and Middle Savers by incorporating some or all of the suggestions presented here. These suggestions provide ideas to plan sponsors on how to increase plan participation and savings rates among plan participants, as well as promote overall financial wellness and improve spending behavior among employees. Each plan sponsor, however, needs to assess these suggestions in light of their plan’s particular circumstances.


If you have any questions or comments on employee benefit plan matters, please call or email Rich Baker. He can be reached at 415.869.5578 or rbaker@sldcpa.com.