Can you believe “Top Gun” celebrates its 30th anniversary this month?
In 1986 Maverick and Goose competed to be best in their class and earn the “Top Gun” title. Camcorders were becoming a household item. Aerosmith and Run DMC were mixing rock and hip-hop. IBM announced its first laptop computer, weighing in at a feather-light 12 pounds. We were living at the edge of innovation, complete with bomber jackets, faded Levi’s® and aviator shades.
Sitting in the movie theater opening night, sipping on my bottle of New Coke, I couldn’t have imagined the change we would experience over the next 30 years. This is especially true when we consider the evolution of the 401(k) since the inception of that very first plan in 1981.
Popularity versus success
Through the 80s, popularity and style ruled. Remember watching “Miami Vice” wearing your Swatch® watch and your oversized Hypercolor t-shirt? Enough said.
First-generation 401(k) plans were no different. They were built for popularity. They gave employers a tax benefit and reason to drift away from the pension plan, while offering employees a tax break and other incentives to join — matching contributions, loans and withdrawal options. The main goal: participation.
Fast-forward 35 years. Workplace 401(k) plans are now the primary source of retirement income for most Americans. But these original plan designs, which focused almost exclusively on popularity, haven’t encouraged workers to save enough. As a result, retirement needs aren’t being met.
“I feel the need … the need for speed!”
With pension programs sparse, and retirement-readiness levels critically low, we channel our inner Maverick and Goose. We feel the need for speed to get to better outcomes. The good news: we won’t need to do a 4g inverted dive with a MiG 28 to make it happen. We will need a next-generation plan design that reflects what we know today about savings habits and participant behavior.
“Talk to me, Goose”: unintended consequences
Here’s the deal: from offering generous loan provisions to encouraging participants to “just do enough to get the match,” our focus on popularity and comfort over success and necessity, failed. It’s not our fault. We just didn’t have the luxury of hindsight and participant research — until now.
Thankfully, well-intentioned first-generation programs are innovating. In recent years, I’ve seen a move away from leakage provisions — like loans and hardships — and a steady shift toward automatic provisions specifically designed to combat self-sabotage and to work with inertia. And the industry is clearly evolving.
- From 2006 to 2015, the number of plans with automatic enrollment provisions increased from 17% percent to 41%.*
- In 2015, 33% of plans included an automatic escalation provision.*
Once you make the important connections between plan design, participant behavior and readiness, the fear of employee disruption is swapped for anticipation of better outcomes.
Graduating to top gun status: automatic plan design
Enter the plan design that will buzz the flight tower and kick-start retirement readiness for all:
- Automatic enrollment with a sweep: 6% elective deferral for all eligible employees, not just new hires
- Automatic escalation: 1% a year up to at least 10%
Yes, this is a courageous approach, but it’s also transformational. Automatic features are increasing participation and deferrals. My clients are seeing staggering, positive results.
It’s time we take our retirement plan programs to the next level and graduate to top gun status. “Elite” is earned by following rules of engagement.
We need to remove provisions that drain savings. And we need to safeguard the savings process by implementing meaningful automatic features designed to outwit our human hardwiring. Taken together, these bold moves will build real, needed success back into retirement savings programs.
Now, let me ask, what are you doing to be a top gun plan sponsor?
* 2015 PLANSPONSOR DC Survey: Plan Benchmarking, January 2016
Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group®, Des Moines, IA 50392.
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