Retirement plan design: 4 key strategies to consider
Retirement planning is a top priority for many Americans, yet significant barriers remain, leading to U.S. adults consistently ranking saving for retirement as their number one worry. Hindered by complex decisions about how much to contribute or which investments to choose, most American workers need to catch up to their savings potential. Indeed, nearly 1 in 4 workers with access to an employer-sponsored retirement savings plan (23%) did not participate in 2023 — and participation rates are even worse for those with lower wages.
Employers have a unique opportunity — and responsibility — to address these challenges. Offering a quality retirement plan is a critical employee benefit that can help employers to both recruit and retain workers, as more than three-quarters (76%) report that having a job with an employer-sponsored retirement plan is either “extremely” or “very” important. For many workers, an employer-sponsored retirement plan is the primary, and sometimes only, vehicle for building long-term financial security.
And, surprisingly, costlier employer incentives like generous match rates alone can fall short in driving enrollment and saving behaviors. Fortunately, research from behavioral science can offer an effective toolkit for designing plans that encourage participation, optimize savings, and empower employees to secure their futures.
Employers must rethink their retirement benefits and adopt science-backed approaches that drive meaningful impact. Here are four key strategies to consider:
1. Encourage Enrollment
Enrollment is the first and most critical step toward retirement readiness. Yet, many employees delay participation due to “hassle factors,” such as complex paperwork or uncertainty about how much to contribute. Others may experience the “ostrich effect,” avoiding enrollment altogether out of fear of confronting financial realities.
<!–>
Automatic enrollment is a proven solution to these challenges. By eliminating friction, it simplifies the decision-making process and helps employees act on their intentions. The results speak for themselves: retirement plans with auto-enrollment achieve participation rates as high as 94%.
–>
For employers hesitant to adopt automatic enrollment, active choice is another effective approach. Active choice prompts employees to make a deliberate decision about enrolling during onboarding. Research shows that this strategy can double participation rates and significantly boost contributions, empowering employees to take the first step toward retirement savings.
<!–>
2. Build savings balances
–>
Once employees enroll, the next challenge is determining how much to save. Behavioral science reveals that default contribution rates play a critical role in shaping savings behavior. If set too low, these rates can pull down the amount people choose to save. Alternatively, setting a higher default contribution rate — around 6%–7% — nudges employees to save more without deterring them from participating in the plan.
<!–>
Employers can also leverage contribution matching to encourage higher savings rates. For instance, raising the match threshold from 5% to 7% can prompt employees to increase their contributions to maximize their match.
Auto-escalation features in conjunction with these strategies further enhance savings growth by automatically increasing contribution rates annually. This approach helps employees save more over time with minimal effort, as it’s easier to commit to future increases rather than immediate ones. By combining these strategies, employers can create a seamless pathway for employees to build robust retirement balances.
–>
3. Simplify Asset Allocation
<!–>
Choosing the right investments can be overwhelming for employees, leading to decision paralysis and lower participation rates. Plans with too many options often exacerbate this problem, as employees struggle to evaluate their choices and make informed decisions.
–>
Simplifying asset allocation is a key solution. Offering a curated selection of funds — ideally fewer than 10 — helps reduce complexity. Target-date funds can be another valuable tool, automatically adjusting asset allocation as employees approach retirement . These funds simplify decision-making and have been shown to increase retirement wealth by as much as 50% over 30 years compared to self-managed portfolios.
<!–>
4. Protect balances
–>
Building retirement savings is important, but protecting those balances is equally critical. Leakage from job changes or financial emergencies poses a significant threat to long-term financial security, with an estimated 2% of net retirement contributions lost each year.
<!–>
Automatic portability can help to mitigate this problem. By seamlessly transferring retirement balances to a new employer’s plan or rolling them into an individual retirement account, this feature minimizes cash-outs and preserves savings momentum. In addition, offering repayment options for hardship withdrawals provides employees flexibility to access funds in emergencies while replenishing their accounts over time, positively impacting participation and savings rates.
–>
Committing to building long-term value
<!–>
Behavioral science provides a powerful framework for designing retirement plans that drive participation, optimize savings, and enhance financial health. Strategies like automatic enrollment, higher default contribution rates, and simplified investment options empower employees to overcome inertia and make meaningful progress toward their goals.
–>
For employers, these strategies offer significant benefits. A robust retirement plan demonstrates a commitment to employees’ well-being, a factor that 60% of workers say increases their likelihood of staying with their current employer. This makes retirement benefits a critical tool for attracting and retaining top talent in a competitive labor market.
<!–>
Each year during open enrollment, employers and their advisors have an opportunity to rethink retirement benefits. By adopting science-backed strategies that prioritize both accessibility and impact, advisors can help employers create lasting value for their workforce — and their organization.
–>
By taking a data-driven, behavioral science-based approach, employers can move beyond traditional “carrots and sticks” to design retirement plans that truly resonate with employees. This not only supports long-term financial security for workers but also strengthens the employer’s ability to attract, retain, and engage a thriving workforce.
<!–>
Heidi Johnson is Sr. Dir. Behavioral Economics at Financial Health Network.
–>