Rethinking Automatic Enrollment
Automatic enrollment is one way employers can help participants to do what they need to do.
Jun 16, 2014
To say I disliked a trip to the dentist when I was a kid would be an understatement. I’m not sure if it was the needles or the drills I hated most, but irrespective of what it was, I could always think of plenty of excuses to not go on appointment day. However, my parents only gave me one reason why I was going… because I needed to go.
Saving for retirement is just one of those things we need to do. Many of us know that, too. The problem is that all sorts of things “in the now” can get in the way of saving…Life gets in the way. As a result, many participants are failing to adequately prepare for their golden years, ultimately translating into anemic retirement accounts that will require them to work well past normal retirement age. Not only does this sour the vision of our retirement years, it can also create complications for employers.
Automatically enrolling participants into a 401(k) Plan is one way employers can help participants to do what they need to do. In fact, industry data shows a well managed plan can be quite effective in accomplishing this goal. With participation rates for plans that adopt automatic enrollment generally close to ninety percent, the simple question is “Why don’t more plan sponsors adopt this feature”?
To answer that question, we first need to acknowledge that some plan sponsors just see little value in offering an automatic enrollment feature. For example, let’s look at a company with a very small number of employees, low turnover, and a very high current participation rate. Or a small company where the owner’s primary reason for setting up the plan is a tax shelter, as opposed to a retirement benefit with little interest if the rank and file participate at all. Right or wrong, plan sponsors in similar situations may see little reward in adding the automatic enrollment provisions to their plan, despite the fact many of them would benefit from adding auto features. Some of their objections may have merit, others not so much. Let’s discuss some of the most common plan sponsor objections to auto-enrollment…and possible solutions to overcome those barriers.
It Costs Too Much!
Cost is almost always a factor with any decision and in the case of auto-enrollment, it comes from two sources: company contributions and plan expense.
With respect to company contributions, it is possible to implement automatic enrollment with minimal impact to the bottom line. One way to do this (assuming the sponsor is not using a safe harbor match) is to redesign the matching formula to require employees to defer at a higher rate to receive the full company match. For example, instead of matching $.50 on the dollar up to 6% (a 3% company contribution), the employer could match $.30 on the dollar up to 10%. Sure, requiring higher employee contributions to receive the full company match may not be popular, but neither is a poorly designed retirement program forcing employees to work well past retirement age.
Another option that may be less impactful to existing employees, while still controlling costs, is to re-design the matching contribution so it is based on years of service with the employer, providing longer tenured employees with a higher matching rate than newer employees. For safe harbor plans, auto-enrollment may eliminate the need to be safe harbor at some point down the road (depending upon how aggressive the automatic enrollment program is designed), and sponsors may be able to restructure their contributions to meet both the company’s and participants’ goals.
Also, the effect of potentially postponed retirements for some employees may generate inflated employer salary and healthcare costs, as well as a lack of advancement opportunities for younger employees; all potential additional hurdles for management. According to one study, the estimated cost to employers is between $10,000 and $50,000 per employee per year for every year that participants delay their retirement beyond normal retirement age1. Of course, it’s very hard to say what the actual financial impacts of delayed retirements would be for a specific plan sponsor, but nonetheless, they should be given some consideration.
It’s Too Paternalistic!
This is the most common objection to the addition of automatic enrollment, as some owners view this feature as exceedingly intrusive into employees’ lives. Furthermore, corporate culture or demographics may make it challenging to convince executives that adding auto features is a good idea. Employers always worry about the negative employee perception: “Why is my employer pressuring me to save?”
Of course sponsors understand there is no use of “force” with adding this feature, as these plans all include an employee opt out provision. In addition, there are several studies which have solidified participants favorable response to auto plan features. This is further supported by very low opt out rates among companies that offer automatic enrollment provisions.
“How” the program is presented to employees can also have a strong bearing on their perception. While certain notifications are a requirement when adding an automatic enrollment provision, there is significant value in face to face communications with the employee base to explain auto enrollment, the opt out provision, and allow a forum for questions and answers. This type of approach not only helps clarify the addition of the feature and how it works, but also demonstrates to employees your willingness to openly communicate with them about changes to their benefits.
It’s Too Difficult to Administer!
Sponsoring a qualified retirement plan can be a daunting task for any employer. Even with the simplest of plan designs, adhering to the required regulations can be complex and confusing, and at times failure to administer a plan properly can be damaging to an employer in more ways than one. Adding an automatic enrollment feature to a plan certainly has the potential to increase administrative duties as well as open the door for additional mistakes. This is where a TPA/Recordkeeper/Provider, with established mechanisms for administering the auto-enrollment process, can make all the difference in the world. The good news is that there are providers in the marketplace who are beginning to establish such programs, which can ease a number of burdens that sponsors face when adding auto features. For example, the best administrators handle the entire eligibility determination and monitoring process, update vesting on a real-time basis, and mail online enrollment letters to newly eligible employees. In addition, they also work to develop both 180 and 360 degree integration with payroll providers, simplifying the auto-enrollment process even more. Further mitigating risk for the plan sponsor, they can augment services to assume 3(16) fiduciary status, making adoption of auto features even more palatable.
Wrap up
As our retirement system continues to evolve and DB plans’ popularity continues to fade, more responsibility is placed on individual participants to secure their own retirement. Because participants are often not equipped to make complex decisions, many delay taking appropriate actions, resulting in deficient retirement balances. Including automatic enrollment features can help participants begin constructing retirement balances without their own direct involvement: a silent financial advisor so-to-speak.
While auto features may not be the perfect solution for every employer, they are one of the most powerful levers at a sponsor’s disposal to influence retirement outcomes. Employers who have historically rejected adding auto features may benefit from revisiting the topic with their Advisors to ensure their objections are sensible and will not end up costing them more in the long run. Professionals in the retirement industry and plan sponsors should all recognize this great opportunity to positively influence participants’ lives by taking advantage of auto enrollment features.