Retirement Plan Blog

11 | 28 | 2010 Posted By Jerry Kalish

I’ve seen it first hand with many employees eligible to participate in 401(k) plans. That is, employees who choose not to save for retirement. Sometimes, there’s a logical and personal reason. But sometimes, it’s just … procrastination.

And that part of it, I could never understand. But I now have a little more insight thanks to an article written by Steve Martin in the November 9, 2010 issue of Inside Influence Report. Mr. Martin alliteratively writes about the persuasive pull of procrastination.

Mr. Martin looks at recent research that explains why many people find it easy to come up with excuses that put off things for some time in the future. Not just unpleasant tasks, mind you, but things like saving money.

The research he cites is the article Procrastination of Enjoyable Experiences, Journal of Marketing Research (2010 in press), written by Suzanne Shu from the Anderson School of Management at UCLA and Ayelet Gneezy from the University of California in San Diego.

Here’s what their study was about. They offered participants a gift certificate good for coffee and cake at a high-end local bakery. Some participants were offered gift certificates that would expire in three weeks and another that would expire in two months.

When asked when they would use the gift certificates, more participants in the two-month group said they would use the certificate than did the three-week group (68% vs. 50%). The reality was quite different. About a third of the three-week group redeemed theirs, but only 6% of the two-month certificate redeemed theirs.

But how do we know that the results of the study were caused by procrastination and not something else. Mr. Martin tells us:

In order to ensure that the results of the study were attributable principally to procrastination and not another factor or reason, a series of follow up surveys were completed. Those who did redeem the certificates reported an enjoyable and worthwhile experience. Those that didn’t redeem them conveyed their regret and were most likely to agree with  statements such as “I got too busy and ran out of time” or “I kept thinking that I would do it a bit later.” There was a much lower agreement to statements such as “I forgot” and “I don’t like pastries” or “It seemed like too much effort.”

So lets relate this study to 401(k) procrastination. Are there employees who think the same way? Particularly, “I kept thinking that I would do it a bit later.” or “It seemed like too much effort.” You bet there are. 

This is exactly what automatic enrollment addresses, or as I said a while back, 401(k) automatic enrollment or how to overcome employee inertia.  

Picture credit: Kevin's Practical Hacks blog post, 6 Simple Steps To Conquer Procrastination. 

10 | 9 | 2009 Posted By Jerry Kalish

In a recent series of three Revenue Notices and four Notices the Treasury Department issued Retirement Savings & Initiatives to help Americans save for the future.

The new Initiatives:

1. Expand automatic enrollment in 401(k) and other retirement savings plans
2. Create easier ways to save tax refunds
3. Allow unused leave to be converted to 401(k) savings
4. Provide a better explanation of rollover options

Let me expand on the last item because of its time sensitive nature. Employees when receiving a distribution from a qualified retirement plan must be given what we in the retirement plan business call a “402(f) notice” named after Section 402(f) of the Internal Revenue Code which explains distribution options and their tax consequences. Most of us use a notice based on IRS safe harbor language dating back to 2002.

IRS Notice 2009-8 (25 pages, PDF) provides updated and simplified model employee notices which explain distribution options for retirees and other terminating employees updated for recent tax legislation. The existing employee notices can be used through December 31, 2009 but only if they are modified to reflect all currently applicable statutory changes, i.e., the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Pension Protection Act of 2006 (PPA).

So what to do? One of our Chicago ERISA attorneys, Andy Williams of Aronberg Goldgehn makes the following recommendations in his recent Retirement Savings & Initiative Bulletin:

All 402(f) notices need to be revised to reflect current statutory requirements. The substantive changes parallel those required for retirement plan documents. (see Retirement Plan Update: 2009 Deadline for Amendments). Plan administrators can use their existing 402(f) notices until the end of 2009, but only if they are customized to reflect current legal requirements. It makes more sense to adopt the applicable model notice from IRS Notice 2009-68. Because it is unclear that there is any grace period for adopting the new employee notice, this change should be made now with respect to all subject retirement plans, which includes plans qualified under Section 401(a) of the Internal Revenue Code (profit sharing, Section 401(k) and defined benefit pension plans) as well as Section 403(b) tax deferred annuity arrangements maintained by not-for-profit entities.

You can check out Andy's other bulletins on his Benefit Law Group of Chicago website.

05 | 8 | 2009 Posted By Jerry Kalish

Here is a link to my column in the May issue of Employee Benefit news about how automatic enrollment in 401(k) plans boosts 401(k) participation. (Free registration may be required). This is the first of the monthly columns I will be writing for Employee Benefit news - an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.

05 | 4 | 2009 Posted By Jerry Kalish

Suppose you’re a plan sponsor that wants to increase 401(k) participation among your low income employees, what do you do?

You know, of course, that employee financial education programs by themselves are not enough to influence a change in employee behavior. You might consider automatic enrollment about which I’ve written about before.

Automatic enrollment has been shown to raise 401(k) participation rates dramatically when it is applied to new hires, particularly new hires who are low earners. In one important study, automatic enrollment increased 401(k) participation rates of those making under $20,000 annually from 13 percent to 80 percent.

Research from the Retirement Security Project (a member of the Retirement Made Simpler coalition) indicates that low-income individuals can, and will, save given the right circumstances.

So what exactly are the right circumstances? If you are thinking outside the box like Staples, you partner up with Progress Through Business, a nonprofit organization focusing on poverty alleviation issues, and H&R Block to offer discounted tax preparation to low-income employees of Staples, Inc. thorough a pilot program called Tax Break first rolled out in January 2007 and run again in January 2008.

What follows are the highlights of a study of this unique program prepared by John Hoffmire, PhD Director of the Center on Business and Poverty University of Wisconsin-Madison, Wisconsin School of Business and Thomas Harms, Treasurer, Progress Through Business, for the filene Research Institute.

What made Tax Break unique was the inclusion of opportunities for low income employees to enroll in both employer and government benefit programs in the tax preparation process. The result was a significant increase in employee participation in such employer-sponsored plans as 401(k) retirement plans, employee stock purchase plans, and tuition reimbursement programs. Enrollment in government benefits also increased, with higher incidences of the Earned Income Tax Credit, child care credits, renters credits, education credits, and various advantages that are available to but sometimes not accessed by eligible low-income taxpayers.

The employees screened for benefits in 2007 showed a 29% increase in 401(k) plan enrollment, a 16% increase in Employee Stock Purchase Plan enrollment, and a 42% increase in scholarship program enrollment. In terms of just the 401(k) plan, employees benefited by accumulating retirement saving and receiving a 50% match by Staples on the first 6% an employee contributed.

The program worked out well for Staples. After one full year of tracking, those who participated in the program during the 2007 tax season showed a 32% improvement in retention over those who did not participate. This improvement in retention more than covered the costs incurred by Staples.

In fact, according to Hoffmire, “For each dollar that Staples invested in the program, they got back more than $6 in retention benefits related to having to hire others and train others who they did not want to lose. This calculation was based on the cost that McDonalds faces when they lose a worker they did not want to see leave the company. In fact, the savings were even greater for Staples, because their costs related to unwanted turnover are even higher than McDonald’s.”

So why the excellent results? Because someone thought outside the box and recognized tax filing is the single largest financial event of the year for that for low income employees. And it presented a unique “teachable moment”. That is, a time at which an individual is most receptive to learning something.

In addition, the researchers found other advantages that accrued to Staples and its employees. Hoffmire said, “On certain days, when the tax program was being promoted in Staples’ large distribution centers, you could notice an improvement in the error rates as employees seemed to show more care for their work as they felt they were being offered a benefit that was worth the equivalent of a 2% raise just through the tax preparation component of the program.”

Here is a link to the complete study, The Economics of Serving Low-Income Employees at Tax Time: Implications for Credit Unions (PDF, 63 page).

Picture credit: red mountain communications. 

01 | 1 | 2008 Posted By Jerry Kalish

It's the New Year, and it's prediction time. So what's ahead for employers in 2008? Paul Secunda in his post in The Workplace Prof Blog, 2008 Workplace Trends, points us to Diane Stafford's predictions in the on-line edition of the Kansas City Star. Paul comments that

These all sound right to me, and I would add that there will be more ERISA class actions by 401(k) account holders, more use of Voluntary Employee Benefit Associations (VEBAs) to deal with the growing problem of retiree health care, and there will be more emphasis on helping employees returning from military service.

I agree, but let me add one more trend for 2008 that I consider an easy prediction to make: more employers adding auto-enrollment for 401(k) plans. The impetus for which is, of course, coming from the Pension Protection Act of 2006. Here are some of the early returns:

• Schwab reports that more than 20% of its Retirement Plan Services clients now automatically enroll employees into a 401(k) plan (a four-fold increase from two years ago).
• New York Life found that 32% of its 401(k) plan clients had adopted automatic enrollment as of September 30, 2007, up from 18% on January 1, 2007.
• A recent Spectrem Group survey suggests that within two years, automatic enrollment will be in place at more than 80% of plans with $10 million or more in assets.

And how do employees feel about auto-enrollment? Very positively based on a recent survey by Retirement Made Simpler, a Washington, D.C.-based coalition that provides resources that help employers simplify the auto-enrollment process. Their survey found that the nearly 700 surveyed adults enrolled in an automatic 401(k) plan, 98% said they were glad their companies offered the retirement plan. But most significant to me was that of those employee who were automatically enrolled only 7% opted out.

Picture credit: The picture above is the album cover from George Benson's 1968 album, The Shape of Things to Come, the remastered version of which was recently released by Verve Records. This was Benson's debut album, and Verve says that "Shape of Things to Come is the true signal of Benson's arrival, not only as a major soloist, but as an artist who refuses to be pinned down four decades later".

12 | 9 | 2007 Posted By Jerry Kalish

Click to make bigger.

Inertia, in classical physics, is defined by Merriam-Webster's Collegiate Dictionary as: “a property of matter by which it remains at rest or in uniform motion in the same straight line unless acted upon by some external force.” In 401(k) plans, inertia can be defined as many eligible employees never signing up for the plan – even when the employer makes a matching contribution.

The Pension Protection Act of 2006 addressed the legal aspect of this issue by adding provisions for automatic enrollment and the Qualified Default Investment Arrangement (QDIA). But concepts like this just don’t pop into the law. It took almost ten years of advocacy in this case.

One of those advocates was Mark Iwry. While serving in the U.S. Treasury Department, overseeing the regulation of the nation’s private pension system, Mark led the government’s initiative to define, approve, and promote automatic 401(k)s beginning nearly a decade ago.

Mark, no longer in government, told me recently that

The automatic 401(k) is a disarmingly simple concept: it enrolls employees at specified contribution levels and in a specified investment, but they can always opt-out, contribute more or less, or invest differently. This enlists inertia in the cause of saving, helping workers—especially moderate- and lower-income and minorities—save more and start earlier.

Mark is now involved with helping make automatic enrollment happen and "simpler". He is the Managing Director of the Retirement Security Project (RSP) and Nonresident Senior Fellow at the Brookings Institution. The RSP is part of a coalition called Retirement Made Simpler which includes the American Association of Retired People (AARP) and the Financial Industry Regulatory Authority (FINRA). Their common mission is to encourage savings through automatic 401(k).

And Retirement Plan Simpler does exactly that by providing research and resources including a Auto 401(k) Toolkit with sample employee communication materials.

And to make it simpler for you, here is a link to the Toolkit (PDF) on their website, and if you look to your left on this page, I've also added a link to their website under "Other Resources".

Picture credit: Scientist Activity Badge on Bill Smith's Unofficial Cub Scout Roundtable