Modifying a Retirement Plan is Tricky

Employers beware: changing your retirement plan’s design can have unfortunate, unintended consequences for your employees.

That’s what happened to the Thrift Savings Plan (TSP) for federal workers, says a new study by a team of researchers for the NBER Retirement and Disability Research Center.

Like many private-sector savings plans, the $500 billion TSP – one of the nation’s largest retirement plans – has automatic enrollment. Federal employees can make their own decision about how much they want to save and, in a separate decision, how to invest their money. But if they don’t do anything, their employer will automatically do it for them.

In 2015, the TSP changed its automatic, or default, investment from a government securities fund to a lifecycle fund invested in a mix of stocks and bonds with the potential for higher returns than the government fund. However, the employer did not change the plan’s default savings rate for workers – 3 percent of their gross pay. (The government matches this contribution with a 3 percent contribution to employees’ accounts.)

After the TSP switched to the lifecycle fund, the new employees at one federal agency – the Office of Personnel Management – started saving less, the researchers said.

This probably occurred because, in passively accepting the TSP’s new lifecycle fund – a more appealing option than the old government securities fund – they were also passively accepting the relatively low default 3 percent contribution.

Employees seem to “make asset and contribution decisions jointly, rather than separately,” the researchers concluded.

They also found some evidence that fewer of the new hires after 2015, compared with those hired just before the change was implemented, increased their savings to 5 percent of pay, which would qualify them for the government’s maximum matching contribution.

The TSP had been tracking the slow decline in workers’ contribution rates long before this research had concluded. The board responded in June and announced that it would increase the TSP’s automatic contribution rate from 3 percent to 5 percent in October 2020.

To read the study, authored by Gopi Shah Goda, Matthew Levy, Colleen Flaherty Manchester, Aaron Sojourner, and Joshua Tasoff, see “Do Defaults Have Spillover Effects? The Effect of the Default Asset on Retirement Plan Contributions.”

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.