by Lisa Higgins, Contributing Editor
If you do not already offer automatic enrollment in your defined contribution plan, you might want to consider doing so. Such a move is likely to increase participation in retirement saving and may be particularly beneficial for young workers, an expert says. Here’s why.
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In its magazine, The Participant, State Street Global Advisors (SSGA) recently published an article highlighting “pioneering” research by David Laibson, a Harvard University behavioral economist, on cognitive performance and explaining its implications for defined contribution plan design.
The article describes two types of intelligence identified by Laibson: Fluid intelligence is “the ability to learn and adapt, which declines rapidly over time” and crystallized intelligence, which is “wisdom learned from experience, which increases” as a person ages.
Based on the finding that borrowers in their 50s paid the lowest interest rates for loans and those in the oldest and youngest age categories paid the highest rates, the study concluded that cognitive performance, which includes both fluid and crystallized intelligence, is at its highest when an individual is in his or her 50s, SSGA reports.
“This finding suggests that plan participants at either end of the age spectrum need the most support” when it comes to retirement planning, the article states.
Young people tend to have “quite a bit of fluid intelligence” and “not so much crystallized intelligence,” says Fredrik Axsater, global head of defined contribution for SSGA. And, because retirement is not top of mind for them, “automatic enrollment may be particularly important for younger employees,” because it can help them start saving for retirement when they otherwise might not do so.
Automatic enrollment already is standard practice for larger plans and should become the norm across all plans, he says.
Meanwhile, since older individuals have less fluid intelligence, it is best for them to make decisions about safeguarding their assets before they reach their 80s or 90s, for example, Axsater explains. He says those discussions should begin at about age 55, so employees can make well-informed decisions around retirement age.
While it is important to educate employees about their retirement saving options throughout their careers and during open enrollment each year, Axsater says employees are more likely to be engaged in those discussions at “inflection points” in their lives, such as when they retire, change jobs, get married, have children, or buy a house—“the bigger, impactful decisions that we make in our lives that also have a financial impact one way or another.”
Axsater recommends that employers be on the lookout for those life-changing events and then leverage those opportunities to engage employees in retirement plan discussions—a move that he says can, in turn, also make them more financially savvy when it comes to other aspects of their lives, such as searching for a competitive mortgage rate.
He identifies two main reasons that employers and plan sponsors should take cognitive performance into account and look for opportunities to get employees involved in retirement planning. First, “it’s important to people’s lives. We have an opportunity to have people retire with dignity, to have the type of retirement they want to have.”
Second, from an employer’s standpoint, having a holistic benefits offering in place helps with recruiting and retention and, as clients have told him, “helps people retire when they want to retire” rather than staying in a job solely for financial reasons and underperforming.