Want teachers to save more? Give them more choices.
When it comes to defined contribution participants, behavioral economists believe complexity kills—the presence of too many options in a 401(k)’s investment menu may act as a turnoff for employees bewildered by the number of funds.
However, a recent study of plans from approximately 4,500 U.S. school districts suggests that for participants in 403(b) plans, typically teachers and other employees of public institutions, more choices leads to higher rates of participation and contribution.
According to “Improving Retirement Savings for America’s Public Educators,” a white paper by Jason Fichtner, a senior lecturer of international economics at John Hopkins University, 403(b) plans using 15 or more investment providers enjoy participation rates 25 percent higher than plans with only one provider. Contribution rates in plans with 15 or more providers were 203 percent higher than plans with only one provider, and account balances in plans with 15 or more providers were 73 percent higher than balances in plans with a single provider.
Throughout the study, participation rates and contribution rates increased as the number of providers in the plan increased. For example, participants in plans with 15 or more investment providers contributed an average of approximately $400 a month to their 403(b), while participants in plans with five to 10 providers contributed an average of a little more than $350 each month.
Single provider plans had the lowest participation rates in the study at 25 percent, well below the national average of 27.1 percent, while plans with 15 or more providers posted participation rates of 33.4 percent.
According to the National Tax-Deferred Savings Association, which published the white paper, a controversy exists among those who believe teachers’ 403(b) plans should pare down to one or a handful of providers, and those who believe that the more traditional model, which might include “thousands” of investment options from “hundreds” of providers, best serves participants.
Access to educational resources or a financial advisor at the workplace, as well as matching contributions, can lead to earlier savings and greater contributions to 403(b)s, according to the study.