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Enrollment Methods Matter in Moving Participants, Research Reveals

New research suggests that the best ways of motivating participant behaviors differ depending on whether the plan relies on voluntary or automatic enrollment.

The research, published by the TIAA Institute, concludes that the choice of automatic or voluntary enrollment influences the mechanisms underlying employee saving behavior.

The researchers determined that procrastination tendency plays an important role in explaining who remains at the default contribution rate under an automatic enrollment regime, while financial literacy and understanding of exponential growth help explain movements away from the default when voluntary enrollment is in place. They also concluded that procrastination tendencies and financial literacy are related to whether an individual is at the maximum annual contribution amount.

The researchers measured procrastination tendencies and financial understanding, including the extent to which people understand exponential growth, which they consider to be a “critical concept for retirement saving decisions” in view of the long-term nature of the investment. The participants in this particular plan (the federal government’s Thrift Savings Plan) were covered by an opt-in enrollment that was later replaced by automatic enrollment. The researchers found that whether employees were hired before or after automatic enrollment affected whether procrastination tendencies play a role in sticking to the default. Under auto enrollment with a default contribution rate of 3%, they found that the tendency to procrastinate was associated with higher tendencies to remain at the default contribution rate, but that those procrastination tendencies did not predict such behavior with voluntary enrollment.

Rather, they found that lower financial understanding (as measured using the five-item battery of financial literacy questions developed by Lusardi and Mitchell) and a misperception of how return from assets compound over time that can lead individuals to underestimate the cost of delaying action when the default contribution rate is not the best choice for the individual increases the likelihood of remaining at the default rate under the opt-in regime – factors that did not allow them to predict those behaviors in an auto enrollment setting.

Additionally, in considering the relationship between financial understanding and procrastination tendencies and other types of saving decisions, they found that individuals who were less likely to procrastinate were more likely to contribute an amount that both maximizes the employer match and at the maximum annual limit and have higher annual contribution amounts on average.

In sum, they found that:

  • People who tend to procrastinate are more likely to stay at the default contribution rate under automatic enrollment.

  • Low financial understanding increases the likelihood of remaining at the effective 0% default contribution rate in an opt-in plan.

  • Non-procrastinators, on average, save more than other employees and are more likely to maximize their employer match.

Ultimately the researchers concluded that focusing on financial literacy and expanding an understanding of exponential growth is likely to be fruitful for engaging participants in plans with voluntary enrollment, while efforts targeted at procrastination tendencies are likely to be particularly important in auto enrollment environments.

The finding were based on an examination of the contribution rates of 5,472 employees at the U.S. Office of Personnel Management, which began using automatic enrollment in its defined contribution plan on Aug. 1, 2010; employees hired before that date had to opt in to participate in the plan. The researchers also fielded an online survey with the same employees to measure procrastination tendencies and financial knowledge, and 1,585 people (29%) provided complete responses on the measures of interest.