Employees'' understanding of employer-sponsored retirement plans, a knowledge gap perspective

The retirement benefit community is currently undergoing a paradigm shift as many organizations cast aside traditional defined benefit plans in favor of defined contribution plans. In other words, instead of employers providing defined benefit plans that are risk free to employees, many organizations have decided to offer defined contribution plans in which employees are responsible for both contributing to the plan and making the investment decisions required therein.As employees are required to make decisions that will ultimately determine their financial security during retirement, it is crucial that employers develop materials that will equip all employees with knowledge about retirement-related issues. Therefore, this study examined the range of knowledge about retirement-related issues that exists among various employee groups within a particular organization. Results showed that education serves as a strong predictor in determining employees' knowledge about retirement-related concepts. Based on the study's findings, implications for future research regarding the development of materials designed to educate employees about employer-sponsored retirement plans are discussed.     

Lessons from the evolution of 401(k) retirement plans for increased consumerism in health care: an application of behavioral research

Employment-based health and retirement benefit programs have followed a similar path of evolution. The relative decision-making roles of the employer and the worker have shifted from the employer to the worker, and workers are more responsible than perhaps they ever have been for their well being--both in terms of their health in general and their financial security during retirement. This shift has been supported, in part, by legislation--namely ERISA, the HMO Act of 1973, the Revenue Act of 1978, and most recently, the Pension Protection Act. This Issue Brief does not pass judgment on this development or address who should bear the responsibilities of preparing workers for retirement or of rationing health care services. The current trend in health care design is toward increased "consumerism." Consumer-driven health is based on the assumption that the combination of greater cost sharing (by workers) and better information about the cost and quality of health care will engage workers to become better health care decision makers. It is hoped that workers will seek important, necessary, high-quality, cost-effective care and services, and become less likely to engage providers and services that are unnecessary and ineffective from either a quality or cost perspective. As employers look ahead toward continually improved plan design, there may be benefits in considering the lessons learned from studying worker behaviors. Specifically, there is evidence about the effects of choice, financial incentives, and information on worker decision making. As a result of research in this area, many retirement plan sponsors have moved toward plan designs and programs that recognize the benefits of well-designed defaults, simplified choices, required active decision making, framing, and commitment to future improvements. With respect to choice, it is now known that more is not always better and may even be worse in some cases. Just as fewer shoppers actually bought a jar of jelly when it was one of 24 as opposed to one of six, evidence has shown that people tend to be less likely to join a company-sponsored retirement plan when more investment options are offered. More choice can also lead to lower satisfaction. It is also known that workers may not be able to appropriately sort through many complex alternatives and that education is not always as effective as employers would hope. Decision complexity often forces people to find a way to simplify, and one of the easiest rules of thumb is to pick the option with the lowest short-term cost, even when that alternative is more costly in the longer run. It is also known that, for good or for bad, choices are constructed on the fly; preferences are dynamic, and logic does not always apply. Financial incentives are helpful in motivating behavior, but they do not affect everyone's decisions. Despite significant financial incentives to participate in 401(k) plans, many workers choose not to. Similarly, despite many of the financial incentives embedded in health care plan design, it can be expected that these incentives will not effectively motivate and engage all workers. One seemingly rational approach to improve workers' decision making is to provide education and guidance to help them sort through complex alternatives and to demonstrate the value of financial incentives. Certainly, providing education and guidance in the form of decision support tools may be an employer's responsibility. However, some studies have shown that, even when "educated" workers have the intent to make improved decisions, they often lack follow-through and fail to take action. In short, education and guidance may not be enough to foster improved health care consumerism. Some employers have begun to design benefit programs with a view toward overcoming behavioral tendencies that negatively affect workers' well-being. Newer retirement plan designs involve careful consideration of default choices. These defaults apply unless workers actively choose a different alternative. Typically, the default attempts to "nudge" workers toward optimal behavior. In the case of 401(k) retirement plan design, more employers are moving toward a default of automatic enrollment in the plan, with automatic investment in a diversified portfolio. Still, additional empirical research and experimentation may be needed to further understand the effects of new retirement plan design features. Future work may also precisely illuminate how the lessons discussed in this Issue Brief may apply to health care plan design that results in improved health-related behaviors. Given the impressive preliminary results in improving retirement planning behaviors, such research and experimentation are likely to be worthwhile.     

EMPLOYEE FINANCIAL LITERACY AND RETIREMENT PLAN BEHAVIOR: A CASE STUDY

This article uses administrative data on all active employees of the Federal Reserve (FR) System to examine participation in and contributions to the Thrift Saving Plan, the System's defined contribution (DC) plan. We link to administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, FR employees are substantially more financially literate than the population at large. Most importantly, financially savvy employees are also most likely to participate in their DC plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. We examine changes in employee plan behavior 1 year after employees completed a Learning Module about retirement planning, and we compare it to baseline patterns. We find that those employees who completed the Learning Module were more likely to start contributing and less likely to have stopped contributing to the DC plan postsurvey. In sum, employer‐provided learning programs are shown to significantly impact employee retirement saving decisions and consistent with a lot of other research, higher levels of financial literacy are found to have a beneficial impact on retirement saving patterns. (JEL J3, H7)     

THE ROLE OF INFORMATION ON RETIREMENT PLANNING: EVIDENCE FROM A FIELD STUDY

Many households neglect the pivotal task of planning for retirement. Proposals to stimulate employees to save for retirement in the workplace include tax subsidies, which are costly, and using automatic defaults, which may not complement the heterogeneous preferences of savers. This randomized field study shows that an information‐based intervention increases reported retirement plan participation, emergency savings, and using a budget. Employees offered access to education increased actual retirement deferrals by $26 per month. These results suggest that retirement education programs may be an effective strategy to increase retirement planning and saving behavior. (JEL J26, D14, D91)     

„Neue Berater braucht das Land?“ – Eine empirische Analyse der Charakteristika potenzieller Nachwuchskräfte in der Finanzdienstleistungsbranche und Konsequenzen für das Employer Branding

Demographic change and associated shortage of skilled labor as well as changing values in future generations of employees are omnipresent. In addition, financial service providers are facing further challenges such as impacts caused by the financial crisis and the commission remuneration model in order to reach suitable employees, so that a target group oriented employer branding strategy plays an important role.Therefore, this paper investigated characteristics of potential employees who are interested in the financial services industry and also in salary models based on commission rather than fixed pay. To that end, we conducted an online survey with students as representatives of future employees. The questionnaire investigated expectations of potential applicants regarding their employers, their information seeking behavior (especially regarding online media), values, and personality characteristics. Results give insights into successful media use and corporate presentations of employers, but also illustrate the low attractiveness of the financial services industry and also commission remuneration models. Therefore, the importance of a successful employer branding strategy is emphasized.     

Work-site health and fitness programs: Impact on the employee and employer

Physical fitness and health lifestyle habits have been reported to lower the risk of death from disease, foster healthy muscles, joints and bones, and enhance personal function and mental health. Given these benefits, many employers are implementing health and fitness programs into their workplace with the goals of improving and maintaining the health of their employees and increasing worker productivity. However, research is still being conducted to determine if these programs are an effective means of achieving these goals. OBJECTIVE: The purpose of this paper is to investigate the impact of these programs on employee physical and mental health, employee work performance, and the employer. This paper also investigates the effectiveness of the specific program structures and intervention procedures that were used in the employee health and fitness programs that have been implemented. STUDY DESIGN: This paper analyzed 15 previously conducted studies to investigate the impact and design of employee health and fitness programs. RESULTS: The reviewed literature suggests that the incorporation of an employee health and fitness program can have positive effects for both the employee and the employer. Programs that are structured using a variety of physical fitness programs, health education classes, outreach and one on one counseling with follow up contact have proven to be most beneficial in terms of employee and employer satisfaction. CONCLUSION: The implementation of an employee health and fitness program can have positive lasting effects on both the employee and employer. In addition to implementing programs that offer a variety of choices and one on one counseling, employers would benefit from targeting the at-risk population to ensure that the programs benefit the greatest number of employees possible.     

An on-site ergonomic program: A model for industry

Work related conditions caused by overexertion or repeated trauma affect millions of American workers. These conditions can result in time off from work, decreased productivity, and high financial costs, not to mention impairment of the worker. According to the Occupational Safety and Health Act (OSHAct) of 1970 [26], employers are required to provide hazard free workplaces for their employees. Fortunately resources exist to help employers set up on-site ergonomic programs to reduce the hazards that contribute to cumulative trauma disorders (CTDs) or other injuries. Companies that have implemented comprehensive ergonomic programs have reported benefits, most significantly, decreased injuries, and cost savings. A model is described for industry on starting and managing a successful on-site ergonomic program.     

Defined contribution health benefits

This Issue Brief discusses the emerging issue of "defined contribution" (DC) health benefits. The term "defined contribution" is used to describe a wide variety of approaches to the provision of health benefits, all of which have in common a shift in the responsibility for payment and selection of health care services from employers to employees. DC health benefits often are mentioned in the context of enabling employers to control their outlay for health benefits by avoiding increases in health care costs. DC health benefits may also shift responsibility for choosing a health plan and the associated risks of choosing a plan from employers to employees. There are three primary reasons why some employers currently are considering some sort of DC approach. First, they are once again looking for ways to keep their health care cost increases in line with overall inflation. Second, some employers are concerned that the public "backlash" against managed care will result in new legislation, regulations, and litigation that will further increase their health care costs if they do not distance themselves from health care decisions. Third, employers have modified not only most employee benefit plans, but labor market practices in general, by giving workers more choice, control, and flexibility. DC-type health benefits have existed as cafeteria plans since the 1980s. A cafeteria plan gives each employee the opportunity to determine the allocation of his or her total compensation (within employer-defined limits) among various employee benefits (primarily retirement or health). Most types of DC health benefits currently being discussed could be provided within the existing employment-based health insurance system, with or without the use of cafeteria plans. They could also allow employees to purchase health insurance directly from insurers, or they could drive new technologies and new forms of risk pooling through which health care services are provided and financed. DC health benefits differ from DC retirement plans. Under a DC health plan, employees may face different premiums based on their personal health risk and perhaps other factors such as age and geographic location. Their ability to afford health insurance may depend on how premiums are regulated by the state and how much money their employer provides. In contrast, under a DC retirement plan, employers' contributions are based on the same percentage of income for all employees, but employees are not subject to paying different prices for the same investment.     

Retirement Confidence Survey 2000 including results from the RCS Minority Survey and the Small Employer Retirement Survey

The year 2000 represents the 10th anniversary of the Retirement Confidence Survey (RCS), and the third year for the Minority RCS and Small Employer Retirement Survey (SERS). Key RCS findings over the past 10 years include: The fraction of workers saving for retirement has trended upward, and today 80 percent of households report that they have begun to save. The fraction of workers who have attempted to calculate how much they need to save for retirement has risen noticeably over the past several years. Today, 56 percent of households report that they have attempted the calculation. One-half of workers who have attempted such a calculation report that it has changed their behavior, such as saving more and/or changing where they invest their retirement savings. Workers who have done the calculation appear to be in better shape regarding their retirement finances. Worker confidence in the ability of Social Security to maintain benefit levels bottomed out in 1994 and 1995. Workers today are just as confident as they were in 1992, although the majority remain not confident in Social Security. Regarding overall retirement confidence, Hispanic-Americans tend to be the least confident among the surveyed minority groups that they will have enough money to live comfortably throughout their retirement years. Key SERS findings include: While cost and administrative issues do matter to small employers, they are not the primary reasons for low plan sponsorship rates. Employee-related reasons are most often cited as the most important factor for not offering a retirement plan. Business-related reasons, such as profitability, are also a main decision-driver. It is important to note what small employers without plans do not know about plan sponsorship. Small employers that do sponsor a retirement plan report that offering a plan has a positive impact on both their ability to attract and retain quality employees and the attitude and performance of their employees. The survey results indicate that many small company nonsponsors may not be aware of such potential business benefits from plan sponsorship. In addition, many nonsponsors are unaware of the plan options available to them, in particular the ones created specifically for small employers, such as SIMPLE and SEP retirement plans. Therefore, some small employers may be making a premature decision not to sponsor a plan based on incomplete information.     

Financial literacy and the design of retirement plans

We design and administer a financial literacy test tailored to a specific defined contribution plan. We find that participants show fairly good knowledge of the basic mechanics of the plan, but are unable to differentiate among various investment options. Knowledge is particularly low among women, low income and low education employees. We also find some evidence that personal contributions lead to more knowledge. These results support plan designs that have few investment options and encourage personal contributions.     

The 1999 Small Employer Retirement Survey: building a better mousetrap is not enough

As of 1995, there were 5.3 million small-employer firms (100 or fewer employees) in the United States. These small firms employed 38.0 million individuals, representing 38 percent of all employment. Therefore, low retirement plan coverage among small employers directly affects a sizeable fraction of the national work force. There are a number of reasons why more small employers do not offer retirement plans. Cost and administration-related issues do matter, but for many small employers these take a back seat to other issues. For some, the main driver is the financial reality of running a small business: Their revenue is too uncertain to commit to a plan. For others, the most important reasons for not sponsoring a plan are employee-related, e.g., the workers do not consider retirement savings to be a priority, or the employer's work force has such high turnover that it does not make sense to sponsor a plan. Many nonsponsors are unfamiliar with the different retirement plan types available to them as potential plan sponsors, especially the options created specifically for small employers. For example, most nonsponsors said they have never heard of (36 percent) or are not too familiar with (20 percent) SIMPLE plans for small businesses. Fifteen percent of small employers report that they are very likely to start a plan in the next two years, while 24 percent say this is somewhat likely. Nonsponsors report that the two items most likely to lead to serious consideration of sponsoring a plan are an increase in profits (69 percent) and business tax credits for starting a retirement plan (67 percent). Major drivers of low retirement plan sponsorship among small employers are who they employ and the uncertainty of revenue flows. While issues of administrative cost and burden matter, they are only part of the puzzle. Therefore, the solution is not simply "build it and they will come," by creating simpler and simpler retirement plans geared to small businesses. Rather, it is build it and they will come once the business reaches a certain level of profitability and stability, and once retirement planning and saving are more of a priority for the small employer's workers.     

Health promotion and disease prevention: a look at demand management programs

This Issue Brief describes employers' efforts to contain health expenditures through demand management programs. These programs are designed to reduce utilization by focusing on disease prevention and health promotion. Demand management includes work site health promotion, wellness programs, and access management. Work site health promotion is a comprehensive approach to improving health and includes awareness, health education, behavioral change, and organizational health initiatives. Wellness programs usually include stress management, smoking cessation, weight management, back care, health screenings, nutrition education, work place safety, prenatal and well baby care, CPR and first aid classes, and employee assistance programs (EAPs). These programs are often viewed positively by workers and can have long-term benefits for employers above and beyond health care cost containment. Demand management can benefit employers by increasing productivity, employee retention, and employee morale and by reducing turnover, absenteeism, future medical claims, and ultimately expenditures on health care. Even though a growing number of employers are offering wellness programs, only 37 percent of full-time workers employed in medium and large private establishments were eligible for wellness programs by 1993. However, a recent survey found that 88 percent of major employers have introduced some form of health promotion, disease prevention, or early intervention initiative to encourage healthy lifestyles among their salaried employees. Distinctions must be drawn between short- and long-term strategies. Demand management can be thought of as a short-term strategy when the focus of the program is on creating more appropriate and efficient health care utilization. Disease prevention is characterized by longer-term health improvement objectives. Whether the purpose is to reduce utilization in the short term or in the long term, the ultimate goal remains the same: to reduce health care expenditures while improving overall health. This goal can be achieved through the use of health risk appraisals, organizational health risk appraisals, high risk programs, awareness programs, medical call centers, return to work programs, EAPs, and smoking cessation programs. Studies of a health program's cost effectiveness must disentangle the effects of many competing factors on cost effectiveness. For example, a health risk appraisal program may identify health problems of which the patient and the health care provider were unaware, resulting in the treatment of these health problems. At the same time, the employer may have switched from a nonmanaged pharmaceutical program to a managed program with incentives for participants to utilize generic and/or mail order drugs. As a result, when evaluating a health promotion program, the long-run impact on the program's cost effectiveness is most important.     

Retiree medical plan design: determining the philosophy, communicating the need

Much has been written, both in benefit-related journals and in the general press, about the recent statement, FAS 106, issued by the Financial Accounting Standards Board (FASB). This statement requires most employers to begin accounting for retiree health care benefit costs for active employees as well as current retirees, creating a significant negative financial impact. Most of the attention has been focused on getting the numbers that will tell the extent of the impact resulting from FAS 106. The next step has been to review retiree medical coverage to see how the affected companies can change it to reduce their liability. Although the urge is strong to adopt a quick-fix solution, employers can greatly benefit by reviewing their benefit philosophies and making plan decisions that make sense for them. This article discusses key questions that can help focus the issue on company philosophies and lays out a framework for determining suitable plan designs that can also help companies manage the retiree medical liability.     

Who Participates and Who Benefits From Employer‐Provided Child‐Care Assistance?

Support from employers to help parents balance work and family responsibilities has become an increasingly important issue, particularly in the United States, where public support for families is scarce. Little is known about the effectiveness of employer‐provided child‐care support. Who participates in these programs, and what are their benefits? This study is among the first to address these questions using a dataset that combines administrative with survey data from employees at a large organization. Findings indicate that employer financial support for child care can be structured so that employees with the greatest need benefit and employee participation is not associated with stigma. Results suggest the employer benefits from increased employee commitment and reduced employee stress, but employees do not report increased parent or child satisfaction with care. Although employer financial support alone cannot compensate for structural problems with regard to child care, it may reduce stress and increase employee commitment in the workplace.     

Austerity plan announcements and the impact on the employees’ wellbeing

This study investigates the impact of austerity plan announcements on employees’ wellbeing. We exploit the unexpected announcement of a drastic wage cut (25%) related to public sector employees in Romania. Using data from the Eurobarometer Surveys and the European Quality of Life Survey, we employ a difference-in-difference research design combined with matching, based on entropy balancing, to identify the causal effects. Our results reveal that the mere announcement of austerity measures leads to an overall drop in life satisfaction among those working in the public sector. We also show that men, and especially married individuals, are most affected by the substantial wage cut announcement. Contrary to previous research, we find that public sector employees with higher levels of education are more likely to be affected by this policy communication compared to those with only secondary or primary levels of education. Our results also suggest that the negative effect of the announcement is not persisting over time.     

THE NONMONETARY EFFECTS OF FINANCIAL FACTORS DURING THE INTERWAR PERIOD

This paper employs vector autoregressions to estimate the nonmonetary effects of financial sector shocks on output and prices during the interwar period. Variance decompositions indicate that the nonmonetary financial proxies have significant and important effects. Impulse response functions indicate that most of the significant shocks to our financial crisis proxies have negative effects on output and prices. Focusing on the depressed conditions of the 1930s, historical decompositions indicate that the nonmonetay financial crisis variables are generally more important than the monetary base in explaining macro behavior. Our findings thus support theoretical models emphasizing the important nonmonetay effects of financial variables.     

Small employers and health benefits: findings from the 2002 small employer health benefits survey

Overall, 19 percent of small employers offering health benefits made changes to their health plan between 2001 and 2002. Sixty-five percent increased deductibles and co-pays; 35 percent switched insurers; 30 percent increased the employee share of the premium; and 29 percent cut back on the scope of benefits. Twenty-six percent increased the scope of benefits offered. Nearly one-quarter of small employers offering health benefits think their firm would change coverage and 3 percent think it would drop coverage if the cost were to increase an additional 5 percent. Most small employers offer sound business reasons for offering health benefits to workers. Many report that it helps with employee recruitment and retention, and increases productivity. More than three-quarters report that offering health benefits is "the right thing to do." Most small employers that do offer health benefits report that it has a positive impact on various aspects of the business, such as recruitment, retention, employee attitude and performance, employee health status, and the overall success of the business. Most small employers that do not offer health benefits tend to think that not offering them has no negative impact on the above aspects of their business or the overall success of the business. However, those not offering benefits are more likely than those offering them to report that most of their employees are high-turnover and stay on the job only a few months. Small employers that offer health benefits tend to be distinctly different from those not offering them. Worker income in firms not offering health benefits tends to be considerably lower than in firms that do offer them. Employers not offering health benefits are more likely than those offering them to have a smaller proportion of full-time employees, and employers that do not offer health benefits have a larger proportion of females, workers under age 30, and minority employees. Of small employers that offer dependent coverage, more than 40 percent report that workers do not take coverage for their dependents because the dependents have coverage from somewhere else, but 35 percent report that employees decline dependent coverage because they cannot afford the premiums. Many small employers that do not offer health benefits are potential purchasers. Eleven percent are either extremely or very likely to start offering health benefits in the next two years, and 22 percent are somewhat likely to start offering health benefits.     

Yoga for stress reduction and injury prevention at work

At work employees face numerous psychological stressors that can undermine their work performance. These stressors, stemming from a variety of possible causes, have enormous health and financial impacts on employees as well as employers. Stress has been shown to be one of the factors leading to musculo-skeletal disorders (MSDs) such as: include back pain, carpal tunnel syndrome, shoulder or neck tension, eye strain, or headaches. Yoga is an ancient form of exercise that can reduce stress and relieve muscular tension or pain. Practicing yoga at the workplace teaches employees to use relaxation techniques to reduce stress and risks of injury on the job. Yoga at the workplace is a convenient and practical outlet that improves work performance by relieving tension and job stress.     

THE OPTIMAL ALLOCATION OF PRIZES IN TOURNAMENTS OF HETEROGENEOUS AGENTS

Tournaments are widely used in organizations, explicitly or implicitly, to reward the best‐performing employees, for example, by promotion or bonuses, and/or to penalize the worst‐performing employees, for example, by demotion, withholding bonuses, or unfavorable job assignments. These incentive schemes can be interpreted as various prize allocations based on the employees' relative performance. While the optimal prize allocation in tournaments of symmetric agents is relatively well understood, little is known about the impact of the allocation of prizes on the effectiveness of tournament incentive schemes for heterogeneous agents. We show that while multiple prize allocation rules are equivalent when agents are symmetric in their ability, the equivalence is broken in the presence of heterogeneity. Under a wide range of conditions, loser‐prize tournaments, that is, tournaments that award a low prize to relatively few bottom performers, are optimal for the firm. The reason is that low‐ability agents are discouraged less in such tournaments, as compared to winner‐prize tournaments awarding a high prize to few top performers, and hence can be compensated less to meet their participation constraints. (JEL M52, J33, J24)     

Questions and answers on health insurance benefit issues

This Issue Brief addresses eight topics in the areas of health insurance and health care costs. Using a question and answer format, the discussion draws largely on EBRI research and the EBRI Databook on Employee Benefits, third edition. In 1993, U.S. expenditures on health care were $884.2 billion, and they are projected to reach $2,173.7 billion by 2005, increasing at a projected average annual rate of 7.8 percent. Health care spending accounted for 13.9 percent of Gross Domestic Product (GDP) in 1993 and is projected to reach 17.9 percent of GDP by 2005. Among the factors contributing to the increase in health care costs are the growth in the number of individuals with traditional reimbursement health insurance coverage, the rapid expansion of technology and treatment options, and demographic factors such as the aging of the population. In 1993, employers, both public and private, spent $235.6 billion on group health insurance, accounting for 6.2 percent of total compensation. Group health insurance is the fastest growing component of total compensation, increasing at an average annual rate of 13.7 percent from 1960 to 1993. An increasing number of employees are required to make a cash contribution to their health insurance plan premium. In 1993, 61 percent of full-time employees in medium and large private establishments who participated in an employee only health insurance plan were required to make a contribution to the premium, up from 27 percent in 1979. In 1993, 185.3 million persons under age 65 had health insurance coverage, while 40.9 million people--or about 18.1 percent of the nonelderly population--received neither private health insurance nor publicly financed health coverage. Of those individuals who had health insurance coverage, 60.8 percent, or 137.4 million persons, received their health insurance through an employment-based plan. In 1993, 15.2 percent of the nonelderly population without health insurance coverage were noncitizens. In six states noncitizens represented a higher proportion of the total uninsured population than individuals in the nation as a whole. An increasing number of employers are self-funding their health insurance plans. In 1994, 74 percent of employers with 500 or more employees self-funded their health insurance plans, up from 63 percent in 1993. An estimated 22 million full-time employees in private industry and state and local governments participated in a self-funded employment-based health insurance plan.(ABSTRACT TRUNCATED AT 400 WORDS)