Morningstar Magazine - June/July 2017 - 67

Minding the Gap-How High Is Too High?
In E X H IB IT 3 , we see that, similar to previous
T. impact
Rowe Price
% oflevels
Plans
To BrightScope/ICI
better understand the
of how different
findings, higher base recommended savings
default savings rates affect savings decisions,
led to higher savings rates regardless of
60
59
approach. In fact, respondents saved more in
Morningstar Investment Management
aggregate at an assumed 12% default savings rate
commissioned Benbrook Analytics to conduct an
as they said they would at lower levels. Again, 40
online survey. The benefit of a survey is that
38
this suggests the default savings rate can serve as
aspects of decisions can be controlled for
29 anchor (or nudge)
a powerful psychological
(something that is difficult to do using empirical
for participants when deciding how much to save20
data). A problem with a survey is that it is
for retirement.
hypothetical, and
14 actual participant decisions 13
7
5
11
5
4could vary
3 during the enrollment process. 11
1
0
0
Default
Savings
Rates
Need
to
Rise
Therefore,
there
is
some
overlap
with
the
response
_
>
1
2
3
4
5
6
7
Overall, nudges in the form of defaults in DC plans
choices in the survey and the empirical data to
Default Deferral Rate for Automatic Enrollment Plans (%)
have been successful. Defaults have improved
ensure consistency. We surveyed only full-time
employees' investment decisions and participation.
workers whose company offered a retirement plan.
Most DC participants have no interest in building
portfolios, so popular default investments,
The default savings rates considered were 3%,
6%Participant
, 8%, 10%, and
12%
(
250
surveys
each).
such as target-date funds, have clearly resulted in
Weighted
Plan Weighted
The default savings acceptance rate for the survey
better outcomes for most investors. Additionally,
Average Initial Deferral Level (%)
respondents was slightly lower than the default
auto-enrollment has improved participation.
8 rates noted in the empirical analysis
acceptance
7.6
7.0 have been less
above. For example, the average acceptance
Where the benefits of defaults
6.4
rates for6 3% and 6% defaults were approximately
clear is on the5.9
savings side. Default savings rates
38% and 52% for the survey, versus 55% and
are too low to ensure retirement success for
5.1
4.8
60% for4the empirical 4.3
data, respectively. However,
participants, with 3% being the most common plan
4.1
4.0
default acceptance across all respondents was
default today. All is not lost, though; plan sponsors
3.0
approximately 50%, which suggests the
are starting to realize the importance of higher
2
recommended savings level did not significantly
default savings rates, and they're starting to use
affect acceptance.
this nudge more effectively.
0
2
3
4
5
6
Default Savings Rate (%)
EXHIBIT 3

Powerful Nudge Our own survey confirms that default savings rates serve as an anchor
for participants when they decide how much to save.

Average Savings for Respondents Who Don't
Save at the Base Savings Rate

8.18

Average Initial Deferral Level
11.54

10.51
9.04

David Blanchett, Ph.D., CFA, CFP, is head of retirement
research for Morningstar Investment Research,
a registered investment advisor. Please see disclosures
on Page 6. He is a member of the editorial board
of Morningstar magazine.
References
Blanchett, D., Finke, M., & Pfau, W. 2017. "Contributions
Are Paramount for Retirement." Morningstar magazine,
February/March 2017, P. 42.
BrightScope/ICI. 2016. "The BrightScope/ICI Defined
Contribution Plan Profile: A Close Look at 401(k) Plans in
2014." White Paper.
Chetty, R., Friedman, J.N., Leth-Petersen, S., et al. 2013.
"Subsidies vs. Nudges: Which Policies Increase Saving
the Most?" Issue in Brief 13-3. Chestnut Hill, MA: Center
for Retirement Research at Boston College.
Choi, J.J., Laibson, D., Madrian, B.C., et al. 2004.
"Saving for Retirement on the Path of Least Resistance,"
July 19, 2004.
DCIIA. 2015. "Plan Sponsor Survey 2014: Focus on
Automatic Plan Features." DCIIA White Paper.
Fellowes, M. & Spiegel, J. 2013. "Debt Savers in Defined
Contribution Plans." HelloWallet White Paper.
Hess, P. & Xu, Y. 2011. "Trends and Experience in
Defined Contribution Plans: Paving the Road to Retirement."
Aon Hewitt White Paper.
T. Rowe Price. 2016. "Reference Point 2016." T. Rowe Price
White Paper.

Average Savings Level Across Respondents

9.41

While there have been improvements in DC-plan
design, other larger structural issues remain,
such as leakage and lack of access. Still, things are
headed in the right direction. Expect to see
nudges continue to make DC plans a bit more
paternalistic, gently leading participants to choices
that best serve their needs. K

9.84

9.92

9.80

11.00

12
%
9

6.97

Thaler, R. and Shlomo Bernartzi. 2004. "Save More
Tomorrow: Using Behavioral Economics to Increase
Employee Saving." Journal of Political Economy, Vol. 112,
No. 1, Pt. 2.
Vanguard. 2016. "How America Saves." White Paper.

6
3
0

3
6
Default Savings Rate (%)

8

10

12

Source: Morningstar.

global.morningstar.com/Morningstarmagazine

67


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