Behavioral Judo: Why Employees Should’t Stop at Minimum Auto-Enrollment

From the HR blog at TLNT. (Photo By Dreamstime).
IFrom the HR blog at TLNT. (Photo By Dreamstime).

I never practiced Judo, but I’ve been on the receiving end where I said, “What just happened here? Why am I flat on my back on the mat?”

That is what happens when you are the mother of three boys! Judo practitioners use the opponent’s motion to keep them going in the direction they are going and in the case, take them down to win a match (like in the video below).

Sometimes continuing in the same direction is not a bad thing, of course, if the direction is somewhere you want to go. It is not unlike a “good” habit. A good habit most of us have is to wake up in the morning and brush our teeth. We do it automatically without thinking.

Sometimes continuing in the same direction is not a bad thing, of course, if the direction is somewhere you want to go. It is not unlike a “good” habit. A good habit most of us have is to wake up in the morning and brush our teeth. We do it automatically without thinking.

In terms of finances, many people have already been nudged in the right direction by a simple auto-enrollment in the 401(k) when they started with their companies. Once this gets started, it is kind of a behavioral judo since many employers only have the contribution rate set at about 2 percent, employees don’t even notice it, and every month they make their needed retirement contribution.

Is a 2 percent investment rate enough for retirement?

Here’s where you may want to use the same philosophy and continue to move in the direction you are going.

Stop and think for a minute: Do you think that a 2 percent 401(k) investment rate is going to be enough for your employees to retire someday? Probably not. In terms of your financial goals at retirement, the gentle nudge they get from their employer should only be the start.

There are two reasons you might want to urge them to examine their contribution rate.

If they only stick with the minimum, they may be missing out. First of all many companies still have matching contributions, many will match 25 – 50 percent of contributions up to 6 percent of salary saved. So if an employee is only saving 2 percent, they are missing out on free money. Here is an example:

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  • Using a salary of $40,000 and earnings in account of 7 percent;
  • 6 percent savings = $2400 per year;
  • 2 percent savings = $800 per year;
  • Company match at 25 cents per dollar up to 6 percent = $600
  • Company match at 25 cents per dollar up at 2 percent = $200
  • Loss by not saving up to full match: $400 per year

How a higher savings rate accumulates

What else are your employees losing by sticking with the auto-enrollment? They are also losing the value of their own retirement savings contributions. Let’s compare calculations if you were able to save 10 percent with a company match versus sticking forever to the 2 percent savings.

Same salary and rate assumptions as above. The Saver at 2 percent of income with company match at 25 cents per dollar:

  • In 30 years they would have $121,997.

The Saver at 10 percent of income with company match at 25 cents per dollar:

  • In 30 years they would have $467,656.

Who would you rather be? You might not practice the martial art of Judo but seriously, you can still use the concept for yourself and your employees. Ask yourself what direction are you going and then nudge yourself by increasing your contributions from time to time in increments that work for you. You can painlessly make savings one of those good habits.

This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.

Nancy Anderson is a financial planner with FinancialFinesse.com, the nation’s leading provider of unbiased financial education programs to corporations, credit unions and municipalities with over 400 clients across the country. She has 20 years of experience addressing a broad range of financial planning issue, including work in the financial services industry with positions at Washington Mutual Financial Services and New York Life. Contact her at nanderson@financialfinesse.com.

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