Behavioral science strategies for designing retirement plans

Retirement is top of mind for Americans — and for good reason. Among eight key financial concerns, U.S. adults consistently rank saving for retirement as their number one worry. Yet, despite this awareness, many employees fall short of their savings potential, hindered by complex decisions about how much to contribute or which investments to choose.

With the majority of non-retired Americans expressing doubt about their retirement readiness, employers have a unique opportunity — and responsibility — to address these challenges. For many workers, an employer-sponsored retirement plan is the primary, and sometimes only, vehicle for building long-term financial security.

But here's the catch: Costlier employer incentives like generous match rates alone can fall short in driving enrollment and saving behaviors. Instead, behavioral science offers a surprising and effective toolkit for designing plans that encourage participation, optimize savings and ultimately empower employees to secure their futures.

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As we consider yet another open enrollment season, the need for smarter plan design has never been more urgent — or achievable. Here are some practical, science-backed steps for better plan design:

Encourage enrollment

Enrollment is the first step toward retirement readiness, yet many employees face barriers like complex paperwork or uncertainty about how much to contribute. These "hassle factors" often delay action, while fears about confronting financial shortcomings — known as the ostrich effect — can further discourage participation.

Automatic enrollment addresses these challenges head-on. By removing friction, this proven approach can help overcome procrastination and avoid daunting processes. The results are clear: Retirement plans with auto-enrollment achieve an average participation rate of 94% at one recordkeeper, compared to 67% for opt-in plans.

An alternative for employers hesitant to use automatic enrollment is active choice. By prompting employees to make explicit decisions about enrolling during onboarding, active choice helps employees act on their intentions and increase participation. Studies have shown that this can double participation rates and significantly boost contributions.

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Build savings balances

Once employees enroll, determining how much to save becomes the next challenge. Here, behavioral cues like default contribution rates play a critical role. If set too low, these rates can anchor down the amount people choose to save. Alternatively, setting a higher default rate — around 6–7% — nudges employees to save more without triggering opt-outs. Contribution matching also influences behavior. For instance, raising a match threshold from 5% to 7% can significantly increase savings rates.

Employers can also implement auto-escalation features in conjunction with these strategies to build balance over time. Auto-escalation automatically increases contribution rates annually, helping employees save more with minimal effort. This is particularly effective as employees may find it easier to commit to future increases than immediate ones.

Simplify asset allocation

Navigating investment choices requires a good understanding of investment principles and risk management, which can overwhelm employees and lead to decision paralysis. Plans with too many options often see lower participation rates, as employees struggle to evaluate their choices.

Offering a curated selection of funds — ideally fewer than ten — helps reduce complexity. Target-date funds, which automatically adjust asset allocation as employees approach retirement, are another valuable tool. These funds simplify decision-making and have been shown to increase retirement wealth by as much as 50% over 30 years compared to self-managed portfolios.

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Protect balances

While building savings is critical, protecting those balances is equally important. Leakage from job changes or financial emergencies poses a significant threat to long-term financial security, with an estimated 2% of net retirement contributions lost each year.

Automatic portability can help. By seamlessly transferring retirement balances to a new employer's plan or rolling them into an individual retirement account, this feature minimizes cash-outs and preserves savings momentum. Additionally, offering repayment options for hardship withdrawals allows employees to access funds in emergencies while replenishing their accounts over time, positively impacting participation and savings rates.

Building long-term value

Behavioral science provides a powerful framework for designing retirement plans that not only boost participation but also enhance overall financial health. Strategies like automatic enrollment, higher default contribution rates and simplified investment options empower employees to overcome inertia and make meaningful progress toward their goals.

These strategies also offer significant benefits for employers. A robust retirement plan demonstrates a commitment to employees' well-being, a factor 60% of workers say increases their likelihood of staying with their current employer. This makes retirement benefits a critical tool for attracting and retaining top talent.

As open enrollment continues, employers have an opportunity to rethink their approach to retirement benefits. By adopting science-backed strategies that prioritize both accessibility and impact, employers can create lasting value for their workforce — and their organization.