Americans aren’t very good at saving. But apparently, workers in other countries aren’t either. To combat inertia, several countries (including the U.S. in the private sector) use a feature called automatic enrollment. Employers automatically place or enroll an employee into a retirement plan, while still allowing the employee to opt out of the plan. The purpose of this “nudge” is to encourage participation and increase retirement coverage for workers who otherwise would fall back into bad savings habits.
New Zealand and the United Kingdom have had particular success with state-administered auto-enrollment plans and received attention from AARP and Brookings, and more recently from the OECD (Organization for Economic Cooperation and Development; see Chapter 4).
Giving workers this prod can dramatically impact the number of workers covered by a retirement plan. New Zealand increased coverage from 15 percent of workers under age 65 in 2007 to nearly 65 percent in 2013. The United Kingdom increased their participation rates from 26 percent in 2011 to 35 percent in 2013, the first increase in a decade.
But reaching and maintaining high coverage depends on the design of the program and strategically communicating with and educating target populations. The OECD notes several design factors used in auto-enrollment plans, including the target population, opting-out window, contribution rates, financial and non-financial incentives, and communication strategy. Here are a few highlights:
- New Zealand sets the default contribution rate at 3 percent—with options to increase or decrease contributions)—but with the realization that most members will just choose the default. Just as an illustration, when New Zealand changed their original default from 4 percent to 2 percent, 62 percent of members who joined at the 4 percent rate continued to contribute at this amount even when the default was lowered. Still, New Zealand gives flexibility to members, allowing for “contribution holidays” where members can choose not to contribute if they are experiencing a time of financial stress or simply do not want to contribute for a period but wish to remain in the plan. In contrast to New Zealand, Chile had difficulty maintaining high coverage amongst its self-employed workers (73 percent chose to opt out despite auto-enrollment), and the OECD suspects that this is because of inflexibility in lowering the earnings amount that contributions were based on.
- To further incentivize workers, New Zealand gives a tax credit and a “kick start” of $1,000 to each individual account. The UK gives a 1 percent tax relief for qualified earnings to members. Paired with automatic enrollment, these incentives helped to keep members in the system.
- To educate workers about the national pension program, New Zealand created an extensive communications campaign that included TV, radio, and online ads, a website, and guides and presentations for employers and employees. In the UK, two government organizations were responsible for educating employers and employees, and created a website with planning tools and online portal as well as an advertising campaign. Government-sponsored surveys indicated high awareness amongst workers.
There’s a strong case for auto-enrollment in the U.S., and private companies are increasingly using the policy with very positive results. Public sector plans considering defined contribution, hybrid, or other alternative plans should capitalize on the benefits of automatic enrollment along with the design variables and communications strategy that go into an effective plan.