CAN THE ENROLLMENT EXPERIENCE IMPROVE PARTICIPANT OUTCOMES?

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1 CAN THE ENROLLMENT EXPERIENCE IMPROVE PARTICIPANT OUTCOMES? Forty years ago, employees may have worked for the same company for their entire career and had a pension plan to cover their income needs in retirement. That plan could have provided about 60% of their income, while Social Security provided the other 40%. Many didn t feel the need to save for retirement on their own, instead relying on an unwritten promise that the company would take care of them. But that promise has steadily evaporated. The escalating pension commitment resulted in an unexpected economic burden for sponsoring organizations. Many plan sponsors are closing their defined benefit (DB) pension plans or limiting coverage due to the increasing liabilities and the changing needs of today s workforce. Over the last 20 years, defined contribution (DC) plans, such as 401(k)s, have replaced DB plans as the primary retirement savings vehicle and as a more practical means for employers to support the retirement income needs of their workforce. But the shift from a paternalistic system backed by pension plans to employee-directed 401(k) plans has considerable implications for the retirement security of millions of Americans. This change places more of the responsibility for retirement security squarely on the individual, who may not be well equipped to handle it. Plan sponsors are concerned and rank low employee interest and savings levels for retirement as a top challenge (Figure 1).

2 FIGURE 1: Challenges to employee retirement security Challenges around employee behavior Low employee interest in retirement topics Low savings level 72% 74% Regardless of organization size, the top challenges employers face are underwritten by employee inertia. Frequent loans and/or hardship withdrawals 53% Unbalanced asset allocation 42% Low participation 40% Other 16% Data from a Fidelity Client Panel Survey of 563 clients of all sizes, March Percentages in this graph show the proportion of employers who have ranked these challenges among the top 3. INSUFFICIENT RETIREMENT SAVINGS While the good news is that $19 trillion in savings is invested in total U.S. retirement assets, it is not nearly enough. Well over half of all Americans have less than $25,000 in total savings 1 and, according to Fidelity s Retirement Savings Assessment, 55% of Americans are ill prepared to meet their financial needs in retirement. 2 Now consider the fact that 10,000 people a day turn 65 in this country, and that trend will continue until Many of these Americans will live well into their 90s and beyond. But when the U.S. Social Security system was established in 1935, the average life expectancy was 63, and the retirement age was 65. Since then, as standards of living and quality of health care have advanced, so has life expectancy. Increasing longevity is a major factor for individuals funding their own retirement. 2

3 THE QUESTION: CAN WE DO MORE? Although automatic enrollment has been a boon for plan participation and encourages steady savings habits CAN WE CHALLENGE THE BARRIERS OF THE TRADITIONAL ENROLLMENT EXPERIENCE TO IMPROVE OUTCOMES? BASED ON THE RESULTS OF OUR STUDY, WE BELIEVE THE ANSWER IS AN EMPHATIC YES. (Fidelity recordkept plans with automatic enrollment see participation rates of 84% compared to 53% in plans without 4 ), more needs to be done. Automatic enrollment may not be a universal answer. This feature may also contribute to a set it and forget it behavior, and, if the default rate is relatively low, studies show that employees tend to stick with it. 5 Too many individuals continue to view saving for retirement as a daunting task. Their fear of making the wrong decision can have a negative impact on plan enrollment; employee inertia remains a formidable barrier to plan success. After all, planning for retirement involves two serious decisions: how much to save and how to invest. With varying levels of financial literacy, many people simply do not have a good grasp on how much they need to save for the future. Calculating an optimal contribution rate is a complicated process. In addition, many plans offer numerous investment options, increasing the complexity of the enrollment decision and leading to choice avoidance by employees. Columbia Business School Professor Sheena Iyengar, author of many studies on choice overload, has demonstrated in her research that for every ten new options offered, enrollment drops 1.5% to 2%. 6 Bottom line: The enrollment decision is often too difficult, leading many employees to suffer analysis paralysis. As a result, a significant number of employees drop out of traditionally offered enrollment methods before completion. It s time to find new ways to encourage employees to save for retirement and take ownership of their future. 3

4 FIDELITY S RESEARCH TURNING BEHAVIORAL PATTERNS INTO AN ADVANTAGE Fidelity continues to explore new ways to engage workers in retirement planning and, through our research and analysis, we have uncovered evidence suggesting that simplifying the enrollment process can lead to better participation outcomes. For example, an independent study found that encouraging new hires to simply check a yes or no box to participate in a 401(k) plan raised enrollment by 28 percentage points relative to the opt-in procedure. 7 In another study, researchers gave employees the opportunity to enroll at a preselected contribution rate and asset allocation, reducing a complex set of options into a simple choice of preselected alternatives. Using this approach, participation rates increased between 10 and 20 percent. 8 Fidelity embarked on extensive employee research and testing to determine if a simplified, streamlined enrollment process could improve participation outcomes. Using theories of behavioral economics and principles of choice architecture, our research study tested a specific hypothesis: Study Hypothesis Can a guided enrollment tool with a limited choice of savings rates and a single specific investment option increase the likelihood that employees would 1) fully complete the enrollment process, and 2) save at a higher rate? Based on the results of our study, we believe the answer is an emphatic yes. FIDELITY S STUDY APPROACH AND METHODOLOGY Our study followed nearly 1000 individuals, representing a broad cross section of ages, income levels, job tenures and degrees of investing sophistication. The research involved a process of multiple rounds of interviews with our subjects, hands-on testing, analysis, and refinement. 4

5 Our approach was as follows: Interviews to shape product design First, we conducted interviews with our study participants to ascertain their thoughts, emotions and motivations toward retirement saving. By understanding their behaviors and THE FINDINGS OF THIS STUDY ARE ESPECIALLY ENCOURAGING FOR PLAN SPONSORS WHO WISH TO HELP EMPLOYEES IMPROVE THEIR RETIREMENT INCOME PROSPECTS, AND UNDERSCORE THAT A GUIDED, VASTLY SIMPLIFIED ENROLLMENT APPROACH CAN HELP IMPROVE RETIREMENT PLAN OUTCOMES. choices, our researchers were able to identify and design a product to meet their needs. Based on a series of compelling interviews with the study participants, our researchers determined that they lacked understanding of savings rates and investments, and longed for clear recommendations. For example, some excerpts from the interviews with study participants included the following comments: I would like to see suggestions based on what my employer thinks I should be doing to save for retirement. Male, age 25 I think it is great to automatically opt in to savings. Male, age 30 I love that I can get started and then research when I want. Female, age 29 The experience of these customers may not be representative of the experiences of all customers and is not indicative of future performance or success. Interactive testing of two enrollment approaches Based on the insights we gained from these interviews, our researchers developed an interactive test in which our study participants evaluated two different enrollment approaches (Figure 2): 1. An EasyEnroll service using a simplified, guided enrollment approach where the user was presented with up to three prepackaged options, including a set savings rate and a single specific investment option. 2. A standard enrollment approach where the user would have to decide on and enter their own savings rate and select their own investment options. 5

6 FIGURE 2: Two different approaches to enrollment Screenshots and graphics are for illustrative purposes only. Although some screenshots reflect currently available functionality, others may show concept designs being considered for future development. Fidelity reserves the right to modify or cancel any concept designs being displayed. This information should not be construed as an offer to sell or a solicitation to buy any product or service. The power of suggestion and anchoring The power of suggestion and anchoring are well-known techniques used in behavioral economics to effectively influence consumer actions: Power of Suggestion If something is suggested or an individual expects an outcome, his or her behaviors, thoughts, and reactions may contribute to making that expectation occur. Anchoring Anchoring is the tendency to attach or anchor personal thoughts to a reference point; it is often the first piece of information presented to an individual. Our study tested and confirmed that these techniques could be leveraged to encourage individual saving through a guided experience with EasyEnroll. 6

7 A guided enrollment experience The guided experience presented to our study participants used clearly defined parameters. Each user viewed up to three enrollment packages designed to greatly simplify his or her decision-making. As shown in Figure 3, the EasyEnroll experience had three predetermined elements: 1. A choice of three contribution rates 2. A single specific investment option (an age-based default target date fund) 3. An annual percentage increase (if plan offers) At all times, users were able to navigate to any prior screen via the Back button. If they wanted to compare the standard enrollment versus the EasyEnroll paths, they were able to do so easily. FIGURE 3: Three preset packages simplify the entire enrollment process Screenshots and graphics are for illustrative purposes only. Although some screenshots reflect currently available functionality, others may show concept designs being considered for future development. Fidelity reserves the right to modify or cancel any concept designs being displayed. This information should not be construed as an offer to sell or a solicitation to buy any product or service. 7

8 FIGURE 4: Nine conditions tested CONDITION ENROLLMENT PACKAGES PRESENTED TO USER CONTRIBUTION RATES 1 Three defined packages 8%, 10%, 12% 2 Three defined packages 10%, 12%, 15% 3 Three defined packages 6%, 8%, 10% 4 Two defined packages 10%, 12% 5 Two defined packages 8%, 10% 6 Two defined packages 12%, 15% 7 One defined package 8% 8 One defined package 10% 9 One defined package 12% Next, nine different conditions in the EasyEnroll experience were tested. Study participants in each condition (approximately 100 individuals apiece) were presented with an interactive online prototype where they determined which enrollment package they wanted. Figure 4 shows the combination of predefined savings rates tested. FIGURE 5: Participants prefer EasyEnroll by a large margin 80% 70% 60% 50% 78% RESULTS OF THE STUDY EASYENROLL OVERWHELMINGLY PREFERRED 40% 30% 20% 22% The results of our study were very impressive. Overall, the study participants overwhelmingly preferred EasyEnroll versus the standard enrollment experience 78% to 22% (Figure 5), and, in a very positive sign, chose higher deferral rates based on that choice (Figure 6). 10% 0% EasyEnroll Standard Enrollment (Note: Error bars reflect a 90% confidence interval for the statistics in this study.) 8

9 FIGURE 6: EasyEnroll users contribute more Average Deferral Rate by Tool 9% 8% 8.32% 7% 6.48% 6% Deferral % 5% 4% 3% 2% 1% 0% EasyEnroll Standard Enrollment (Note: Error bars reflect a 90% confidence interval for the statistics in this study.) In two study conditions, users who chose the EasyEnroll option deferred a significantly higher percentage of their salary when presented with preset contribution/deferral rates than the users who selected the standard enrollment option. The average savings rate for EasyEnroll versus standard enrollment was 8.32% versus 6.48% (Figure 6). 9

10 FIGURE 7: EasyEnroll users age contribute more Average Deferral Rate by Age and Tool 12% n=912 10% 8% Deferral % 6% % 2% 0% Age Groups EasyEnroll 8.50% 8.54% 9.20% 8.21% 7.98% 8.31% 7.87% 8.04% Standard Enrollment 6.81% 8.03% 6.67% 5.86% 4.76% 4.21% 6.42% 7.56% (Note: Error bars reflect a 90% confidence interval for the statistics in this study.) EasyEnroll users had a significantly higher savings rate than standard enrollment for ages (Figure 7). 10

11 FIGURE 8: Power of suggestion achieves higher savings rates Average Deferral Rate by Condition and Tool 12% 107 n=912 10% Deferral % 8% 6% % 2% Average Deferral Rate 0% 6%/8%/10% 8% 8%/10% 8%/10%/12% 10% 10%/12% 12% 10%/12%/15% 12%/15% 6.17% 6.18% 8.17% 7.52% 7.98% 8.89% 8.59% 9.00% 10.35% Choosing preset packages with 8/10/12% savings offers the number of choices users preferred and together with employer contributions puts them on the path to save within Fidelity s guideline of 10% 15% of their income. (Note: Error bars reflect a 90% confidence interval for the statistics in this study.) Lastly, across all conditions, as the average of the available percentages increased, the magnitude of participants savings choices also increased. Figure 8 shows, by condition, the average savings rate chosen by study participants in both the EasyEnroll selection and the standard enrollment selection. The results demonstrate the power of suggestion; in other words, the higher the savings rate presented to the study participants, the higher the average deferral rate chosen. 11

12 THE NEXT GENERATION OF ENROLLMENT These findings are especially encouraging for plan sponsors who wish to help their employees improve their retirement income prospects, and underscore that a guided, vastly simplified enrollment approach can help improve retirement plan outcomes and positively influence participants savings rates. Although EasyEnroll requires active selection versus a default approach such as automatic enrollment we believe the enormously simplified approach makes EasyEnroll an effective enrollment solution for active enrollees. Fidelity is committed to continuously researching and testing solutions to improve plan outcomes and promote a positive employee experience. Contact your Fidelity representative to learn more about our research findings and the availability of EasyEnroll for your plan. 1 EBRI, 2013 Retirement Confidence Survey, March These findings are the culmination of a yearlong research project with Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company, which analyzed the overall retirement readiness of American households based on data such as workplace and individual savings accounts, projected Social Security benefits, home equity, and pension benefits. The analysis for working Americans projects the income replacement rate for the average household, compared to pre-retirement income, and modeled the estimated effect of specific steps to help improve readiness based on the anticipated length of retirement. Data for the Fidelity Investments Retirement Savings Assessment (RSA) was collected through a national online survey of 2,265 working households earning at least $20,000 annually with respondents aged 25 and older from June through October Data collection was completed by GfK Public Affairs and Corporate Communication using GfK s KnowledgePanel, a nationally representative online panel. Fidelity Investments was not identified as the survey sponsor. GfK Public Affairs and Corporate Communication is an independent research firm not affiliated with Fidelity Investments. 3 Pew Research Center, December Based on Fidelity analysis of 20,497 corporate DC plans (including advisor-sold DC) and 11.9M participants as of 12/31/ Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans, Shlomo Benartzi, How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans, Pension Research Council Working Paper, Sheena S. Iyengar, Wei Jiang, Gur Huberman, G.D. Carroll, J.J. Choi, D. Laibson, B.C. Madrian, and A. Metrick, Optimal Defaults and Active Decisions, Quarterly Journal of Economics 124, no. 4 (2009): J. Beshears, J.J. Choi, D. Laibson, B.C. Madrian, How Does Simplified Disclosure Affect Individuals Mutual Fund Choices?, in Explorations in the Economics of Aging, ed. D.A. Wise, (2011). For plan sponsor and investment professional use only. Not for use with plan participants. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Sreet, Smithfield, RI FMR LLC. All rights reserved