Motivationally Speaking

As anyone who has (or has been) a teenager can attest, motivation is a tricky business. Once upon a time, it took little more than a smile or a “good girl” to motivate my children to do the right things (alongside the occasional threat to rely on corporal punishment). But as they have grown older, the “motivations” have become more “challenging” (and, unfortunately, frequently louder); not because they are not interested in doing the right things—it’s just that they have other priorities.

Of course, teenagers are really just human beings (despite the occasional rumor to the contrary), and as such, they don’t always do the right thing, or do it as soon as a parent might prefer. So it also goes for adults—specifically, adults in the context of saving for retirement. Realizing that, we have long used certain subtle means of encouraging them to do the right things. We impose vesting schedules to encourage their continued employment, we offer “free money” in the form of company matches to spur their willingness to put some of their own money aside, we allow them to borrow against their savings so that they feel more comfortable about saving larger amounts than they might otherwise—heck, we even offer 401(k) plans to entice them to come to work for us in the first place.

In large part, those motivations have succeeded. Far more people participate in these programs than not, and the vast majority contribute to the exact level to obtain the full company match. More recently, a series of initiatives was first touted, and then legislatively sanctioned, to “motivate” those workers who, for a variety of reasons, had nonetheless been disinclined to take advantage of these programs: automatic enrollment to get them “in,” contribution acceleration to help them get to the right amount, and asset-allocation funds to help them get—and stay—optimally invested.

“Thinking” Caps?

Now, if these new tools work—and, by all accounts, they are working well—then, IMHO, it might well be time to give some new thought to our long-standing assumptions about participant motivation and plan design.

For example, why should the company contribution only go to workers who think they can afford to save? That, after all, is what a matching contribution does. And if you’re going to match contributions, why not do so with a smaller amount applied to a larger range of deferrals? Instead of 50 cents on the dollar up to 6% of pay (which leads participants to stop deferring at the 6% level), why not 25 cents on the dollar up to 12% of pay? Participants will likely save more—and employers might well save some money.

Why maintain these enormous menus of investment options that have to be selected, monitored, and explained—and which require participant involvement to rebalance—when it is so much easier to focus your due diligence efforts on a QDIA solution? And do you still need to offer loans to get workers to participate, when you no longer even require them to fill out an enrollment form?

I don’t mean to suggest that these changes won’t be viewed unfavorably by some. After all, if you used to get a 50% match for only deferring 6%, it’s hard to imagine a scenario in which a 25% match for the same deferral doesn’t look like a benefit reduction. And, as much bother as those bloated investment menus are, many participants like at least the illusion of broad choices—and may well feel a bit hemmed in by a QDIA. As for loans—well, you take that away, maybe more of those automatically deferred participants will actually expend the energy to opt out.

It’s hard to know just exactly how this new era of defined contribution plans—and plan participants—will respond to change. What we do know is that not considering the possibilities associated with these changes can mean that we overlook opportunities.

- Nevin E. Adams, JD