Making small changes to the way employees enrol in voluntary employer retirement savings plans can significantly increase the number of workers who participate in the plans and the rate at which they save, new research finds.
A joint study by Employment and Social Development Canada (ESDC) and Sun Life Financial found that simplifying enrolment forms and encouraging employees to complete the forms on the first day of work led to more employees joining their employer’s plan and choosing a contribution rate that would receive the full employer matching contribution.
“The results of the study clearly indicate that there are significant opportunities to improve employee participation in savings plans offered by their employers, and further, that the effort needed to achieve this improvement is relatively small,” said a report on the study.
It noted that finding ways to increase participation and savings rates is important because recent studies show that up to half of non-retired Canadian adults are not saving enough to maintain their standard of living when they retire.
With most employer-sponsored defined contribution pension plans or group registered retirement savings plans (RRSPs) being voluntary for employees to join, getting workers to sign up can be a challenge.
“Participation rates tend to hover around 50 to 60 per cent,” said Kim Duxbury, assistant vice-president, product and research, group retirement services at Sun Life.
To determine whether changing some of the factors around enrolment would make a difference to participation and savings rates, ESDC and Sun Life decided to test the effect of a simplified form and a “verbal nudge” reminding employees to complete them right away on employee enrolment.
The study, which ran from 2013 to 2018, included 3,760 new hires at 44 workplaces in different industries across Canada. For the study, employers were divided into three groups.
One group’s employees received a simplified enrolment form, but went through the standard process (they were not given the form to complete until they met eligibility criteria).
Employees in another group were also given the simplified form, but were encouraged to complete it on the first day of work when they filled out other payroll and benefits forms, regardless of whether there was an eligibility period for joining.
A third group was a control group. New employees received a standard enrolment form, which they could complete at their convenience once eligible.
The study said it looked at enrolment forms because they tend to be complex, with employees asked to make a choice about enrolling, indicating the amount they want to contribute, and specifying how their contribution will be allocated among the funds available in their plan.
“Those are all very complicated decisions for an employee to make when they really should be excited about starting their job,” said Duxbury.
The simplified version presented information in a more straightforward way, according to the report.
“In most cases, a range of contribution percentages was presented where the contribution rate attracting the maximum employer match was highlighted,” it said. “The decision about which investment option to choose was also greatly simplified: new employees were informed that investments would be allocated to the plan’s default fund, unless they indicated otherwise.”
“Employees were advised to review the other investment options available and were encouraged to assess the different options based on their risk profile.”
The study found that employees who received the simplified form or who had both the simplified form and encouragement to complete it on the first day of work were 24 to 25 per cent more likely to join the plan than those in the control group.
They were also 29 to 30 per cent more likely to select a contribution rate that would maximize their employer’s matching contribution.
“These findings suggest that simplifying the enrolment process and providing an explanation of employer matching leads to greater likelihood of selecting the maximizing percentage,” said the report.
The results should help convince employers to simplify their enrolment procedures and to consider suggesting a higher savings rate when new employees sign up for plans, said Duxbury.
Canadian employers often hesitate to suggest a starting contribution rate higher than zero per cent, she said, putting the onus on new employees to decide whether to stay with zero per cent or select a higher rate.
“We often hear employers and HR professionals say they don’t want to impose on employees. ‘Leave it up to the employee to decide what to do.’ The reality is that inertia then sets in as people don’t take action.”
This contrasts with American employers, who often set the starting contribution rate at the amount that will attract the full employer matching contribution, said Duxbury.
“U.S. employers tend to be bolder when it comes to making decisions for their employees,” said Duxbury.
“They just tend to be more comfortable with, ‘This is the right thing to do. Our employees are going to be better off.’”
Employers in the U.S. also have higher plan participation rates than those in Canada, she said, hovering around 85 to 90 per cent.
She attributes a key reason for the difference to the fact that U.S. employers are allowed to automatically enrol employees in their plans.
“It’s this concept of easy to get in, harder to get out. It takes work to get out and people just do not get around to it.”
In Canada, automatic enrolment is generally prohibited, Duxbury said.
“Auto-enrolment requires changes to the Employment Standards Act because you need express consent to take money off of someone’s paycheque today,” she said.
Even without automatic enrolment, Duxbury said the study showed that encouraging employees to complete enrolment forms right away could encourage them to join an employer’s retirement savings plan.
She also suggested that employers consider eliminating the waiting period — which can range from three months to more than a year — for new employees to join their plan.
“When I talk to employers, I often say, give some thought to having no waiting period and let (employees) join right out of the gate,” said Duxbury.
“Put yourself in the shoes of the employee: You start working for this employer and you get your first paycheque and you start to adjust your standard of living to what your take-home pay is,” she said.
“Then, if you (the employer) come along three months or six months later and tell me that I can join the plan and I can contribute to that, I now need to give something up that I have been spending my money on to have money taken off of my pay. That becomes a much harder decision,” said Duxbury.
While some employers who match employee contributions may worry that their contribution costs will rise without a waiting period, she said they can always adjust when employer matching begins.
“You can have the employer match start kicking in at the three-month point or you can make a retroactive contribution,” she said.
Setting goals for the plan can also help to increase participation and savings rates, according to Duxbury.
“What do you want as your participation rate? What do you want the employees to have as a savings rate? If you start to set goals as an organization, they get measured,” she said.
“A lot of conversations focus on investment performance, but we can’t control the market. We can control or influence the participation rate, the savings rate, that type of thing,” said Duxbury.
“Those are meaningful, tangible things that an employer can do that can drive very different conversations at the pension committee table.”
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