BY GERALD YOUNG
Generational divisions within any workforce can lead to issues in team dynamics and communication. For local government managers, generational issues can also pose challenges in the effective structuring of pension and other benefit programs and in helping to ensure that employees at all career stages are well prepared for a financially secure retirement.
Those who are most attuned to retirement benefit structures tend to be those closest to retirement. Meanwhile, younger workers or those not yet vested in a plan might view retirement as something so far off as to be outside their immediate concern. They may even view local government as a transitory stage in their work experience, not as a long-term career. As a result, this cohort might ignore retirement plan mailings, neglect to contribute to available supplemental savings plans, or respond to invitations to in-person pension plan meetings with flippant disregard for something that only applies to some other generation.1
The Center for State and Local Government Excellence (SLGE) and ICMA-RC have looked at this issue as one that, at its core, has implications for the ability of local governments to recruit and retain talented employees. For example, if only 56 percent of public employers view the base salaries they are offering as being competitive within the labor market, and they’re depending on the fact that 88 percent view their benefits as being competitive,2 what does it mean for recruitment and retention when a significant slice of the potential workforce is not paying attention to your core benefits?
Among the strategies to overcome the inertia of employees not focusing on retirement is to make it easy for them to participate in related benefits plans regardless. Thus, under a traditional pension plan—whether defined benefit or defined contribution—funds are contributed in the employee’s name without the need for any action on their part. Under a supplemental savings plan, such automatic participation is often lacking and early-career employees do not tend to contribute in sufficient amounts to take full advantage of long-term investment growth potential.
To test the effectiveness of employer incentives for supplemental savings, SLGE and ICMA-RC conducted a poll on likely employee behaviors if presented with either automatic enrollment in a supplemental savings plan or automatic escalation of the level of their participation.3
First, respondents were asked if they were auto-enrolled in a supplemental retirement savings plan whether they would choose to remain a part of that plan; 77 percent said they would.
Second, those polled were presented with a default participation rate, with equal portions of the sample presented with contribution rates of 1 percent, 4 percent, 7 percent, or an unspecified amount. Given this, they were asked whether they would stay in the plan, maintain that contribution level, or increase or decrease it. Overall, 33 percent would leave the contribution level at its default percentage, while those indicating a desire to change the rate tended to opt for a higher percentage of savings. For example, among those informed of a default participation rate of 7 percent, the average rate they would select was 7.6 percent.
This tendency to increase beyond the default contribution level may stem from a perception that the default rate is either the minimum required (as perceived by 22 percent), the minimum recommended by the employer (by 17 percent), or the recommended rate (by 25 percent). Whatever the reasoning, employees appear comfortable moving beyond an employer-selected default contribution.
Finally, the poll asked about likely employee decisions if faced with auto-escalation of their participation—an option under which their contributions might increase slightly each year up to some pre-set cap. As you might imagine, there was less support for this option (30 percent). Still, there was fairly strong support for this approach (41 percent) in the cohort that was given a default rate of 4 percent.
Some employers might shy away from auto-enrollment, thinking employees will prefer to spend their money some other way. On the contrary, these poll findings indicate that employees would be supportive of both auto-enrollment at some default contribution rate and potentially also auto-escalation.
Auto-enrollment gives employees a nudge in the direction of retirement savings, while still empowering them to make their own choices of how much to invest and whether to increase, decrease, or discontinue that participation. Interestingly, this was corroborated by the reasons given for disapproving of auto-enrollment, with 69 percent indicating that savings should be the employee’s choice. Considering that the poll presented only a quick snapshot of opinions, actual results that include a more sustained communication plan may be more effective. As a concrete example of such an implementation, in South Dakota, supplemental plan participation rates are 85 percentage points higher for local and state employees who are automatically enrolled compared to those working at jurisdictions or agencies that did not adopt auto-enrollment.4
For those wishing to explore auto-enrollment, the first step is to determine whether there are any state-specific limitations on such an approach. There are only a limited number of states that currently authorize and/or have implemented auto-enrollment, but this number has been growing. As you meet with your retirement system, benefits administrators, employee groups, state elected officials, and other stakeholders, auto-enrollment may be a topic for discussion. Or, as you are reviewing your employee onboarding process, you may wish to consider the subject of supplemental employee savings more generally.
Where managers find ways to emphasize the value of the full compensation package or appropriately balance the benefit priorities of multiple generations of employees, they may find both a more engaged workforce and one that has laid the groundwork for a more secure retirement. As those employees become more vested in their benefit plans and in the organization as a whole, that may also contribute to enhanced employee retention and career-minded thinking. Considering the continuing level of low unemployment, such outcomes can go a long way toward making their governments the employers of choice.
ENDNOTES AND RESOURCES
3 The full report on this polling project is available here: https://www.slge.org/resources/nudging-deferral-rates-within-public-sector-supplemental-retirement-plans