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8/2/2019 W4 G2 Simplification and Saving
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SIMPLIFICATION AND SAVING
Lee Wei Hao
Loh Yi Wen, Yvonne
Mohana Priya
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Introduction
• Household financial decisions are complicated.
▫ Individuals put off confronting these decisions
▫ Discourages employees from timely enrollment inemployer-sponsored savings plan even when they
prefer to participate.
• Can lead to substantial reductions in LR wealthaccumulation
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QUICK ENROLLMENT [QE](By Choi, Laibson, Madrian (CLM))
Asset Allocation(Pre-selected)
Contribution Rate(Pre-selected)
ACCEPT REMAINSTATUSQUO
OR
Increased savings planenrollment at 2 firms by
10-20 percentage points
Introduction
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Providing repeated opportunities touse QE increases the participation
rate
Just as effective at raisingenrollment when its pre-selectedcontribution rate = 4% of salary
(CLM – 2-3% of salary)
Complementary intervention – Easy Escalation
Allows already-participatingemployees to increase contribution
rate to 6% of salary
Assess the effect up to 54 monthsafter its implementation
(CLM – 11 months)
Introduction
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Quick Enrollment Implementations – Company A
40,000 employeesImmediately eligible for the savings plan
Could make before and after tax contributions up to 100% of pay
50% matching contribution for the 1st 4% or 6%
Prior to July 2003
Standard opt-in
Choose:(1) before and
after taxcontribution
rate(2) allocation of funds
July 2003 -Dec 2003
QE – For new employees
Contribution rates:Before-tax = 2% After-tax = 0%
Allocation: Evenly split between money market fund and a
balanced fund
Feb 2004
Adopted QE asa permanent
feature
March 2006
QE–
For new employees
Contribution rates:Before-tax = 4%;
After-tax = 0%
Allocation: 100% inan age-
appropriate targetdate retirement
fund
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Quick Enrollment Implementations – Company A
2nd
ImplementationMid-June 2004 to mid-October 2004Seasoned employees not enrolled in savings plan
Conjunction with the
adoption of Web-based
benefitsmanagement
system
Non-enrolled
employees canenroll in thesavings plans
using new interface
Allocation:
split evenly betweenmoney market
fund and balanced fund
Pre-taxcontributionnot pre-selected
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Impact of Quick Enrollment – Company A
Impact of 2nd QE implementation on savings plan participation
Sample: employees who were continuously employed at Company A and
eligible to participate in its savings plan from Jan 1, 2002 to Dec 31, 2005.
Participation rate increase at 0.3percentage points per month
Participation rate increase at 2.1percentage points per month
Increasing at 0.02 percentagepoints per month
No sign of subsequent reversal
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Impact of Quick Enrollment – Company A
Impact of 1st QE implementation on savings plan participation
Feb to June2002/2003
Feb to June2004/2005
March toJune 2006
Control groupNew hires without QE;
exposed to the 2nd QE
Attended orientationContribution rate =
2% Allocation: Split evenly
between money market fund and a
balanced fund
Attended orientation
Contribution rate =4%
Allocation: Target dateretirement fund
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Impact of Quick Enrollment – Company A
3 percentagepoints higher
21% - 46% / 25 percentagepoints increase
26 percentagepoints increase
Impact of 1st QE implementation on savings plan participation
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Impact of Quick Enrollment – Company A
Impact of QE on initial contribution rates
Cluster atdefault rates
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Impact of Quick Enrollment – Company A
Impact of QE on initial contribution rates
Increased the fraction of employees at each total contribution ratebetween 1% and 6%, but caused little increase at higher contributionrates
f Q k ll
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Impact of Quick Enrollment – Company A
Impact of QE on asset allocation
Feb to June2002/2003
Feb to June2004/2005
March toJune 2006
0.4% split theircontribution flows
evenly
54% split theircontribution evenly
78% contribute to atarget date retirement
fund
2nd ImplementationMid-June 2004 to mid-October 2004
79% split theircontribution evenly
I f Q i k E ll C A
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Impact of Quick Enrollment – Company A
Contribution rate pre-select persistence under QE
• Saving plan participation is very persistent for all cohorts
• Persistence at initial contribution rates is also high
• Early participators who enrolled at the QE contribution rate exhibitless persistence than those before QE.5
▫ Will forgo matching contributions (matching rate = 6%)
I f Q i k E ll C A
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Impact of Quick Enrollment – Company A
Asset allocation pre-select persistent under QE
Remarkablysimilar
Stickier
• 2006 QE is considerably stickier because target date retirementfunds are marketed as customized solutions to the asset allocationproblemmore attractive
• 2004 QE exhibit more asset allocation persistence
▫
Attracted a particularly inertial population
I t f Q i k E ll t C A
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Impact of Quick Enrollment – Company A
Effect of QE on average contribution rates
Q i k E ll t d E E l ti C B
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Quick Enrollment and Easy Escalation - Company B
20,000 employeesImmediately eligible for the savings plan
Could make before and after tax contributions up to 25% of pay 55% to 125% matching contribution for the 1st 6%
Investment options increase from 9 to 12The match was invested in the employer stock
Could not be fully diversified until 55Quick Enrollment implemented in 2003
Jan 2003
Mail to employees who were not
enrolled in savingsplan
If participate,Contribution rates: before-tax = 3%
Allocation: money market fund
Jan 2004
Sent to non-enrolled employees
Contribution rates: before-tax = 3%
Allocation: money marketfund
Feb 2005
Sent to non-enrolled employees
Contribution rates: before-tax = 3%
Allocation: lifestyle fund
Sent Easy Escalation forms to already-enrolled employees (<6%)Increase contribution rate to 6%
I t f Q i k E ll t d E E l ti C B
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• Compare with cohorts before QE: 1 Mar 2000, 1 Feb 2001, 1 Feb 2002
• Standard enrollment (2000-2002) cohorts experienced slow andsteady enrollment increases over time
• QE cohort – participation increases till 41% at 26 months
▫ Each mailing on average converted 10% of previously non-enrolled
recipients into savings plan participants.
Impact of Quick Enrollment and Easy Escalation – Company B
Impact of QE on enrollment
I t f Q i k E ll t d E E l ti C B
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Impact of Quick Enrollment and Easy Escalation – Company B
Impact of Easy Escalation on movements to the match threshold
• Only a small fraction of contributors changed their contribution rates▫ Except Feb 2004 and Feb/Mar 2005Process of the forms
• The effect of each mailing is 14.7%
Impact of Q ick Enrollment and Eas Escalation Compan B
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•
Once enrolled into the plan, persistence of participation is extremely high. Persistence does not vary much by scheme.
• High asset allocation persistence for QE 2003,2004 cohort
• Higher persistence for QE 2005 cohort changed to lifestyle fund
Impact of Quick Enrollment and Easy Escalation – Company B
Persistence of the pre-selects
Impact of Quick Enrollment and Easy Escalation Company B
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Impact of Quick Enrollment and Easy Escalation – Company B
Impact of QE and Easy Escalation on the average
contribution rate
• Increase in average contribution rate over time
C l i
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• QE is a low-cost intervention that reduces the
complexity to make savings decisions.
• It increased savings plan enrollment.
• Participation rates do not subsequently reverse.
• Remains in default for years.
• Easy escalation can also increase contributionrates among those already participated.
Conclusion
C l i
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Conclusion
Recommended