Setting Up Your Employees for Financial Success

I want you to imagine you’re starting a fitness or weight loss program. However, on this program, you have your own full-time personal trainer, nutritionist, chef, wellness coach, housekeeper, baby sitter, fully equipped home gym and personal assistant at your constant service. All your grocery shopping is done for you. All of your healthy meals are prepared for you. Your workout programs are designed for you. Your house is cleaned and your babysitter shows up with your personal trainer first thing in the morning to watch the kids while you do your daily workout. This kind of workout program sounds very appealing, doesn’t it? Sounds like a plan that you would be able to stick with and reach your goals!

As a former certified personal trainer and wellness coach, I’ve spent a lot of time helping people reach their personal fitness and weight loss goals. At the beginning of the program, clients almost always start off with a bang, very motivated to hit their goals and lose weight. Then after two or three weeks, they become frustrated, venting their frustrations and concerns about everything from the number of other weight loss programs available to not having time to prepare healthy meals to what supplements they should take.  I’d explain that weight loss is really quite simple, though not necessarily easy.  Eating less, eating healthier foods and moving more is the formula to losing excess body fat.  Do this consistently every day and you’ll lose weight. Seems pretty simple with all the options on the market, but it can be complicated and daunting. The average person trying to shed the pounds can become overwhelmed. Eventually they are throwing their hands up in frustration and saying “I’ll get around to that fitness thing some day.”

Well, like weight loss and physical wellness, investing for a successful retirement is conceptually a simple process.  Spend less, save more and do it consistently. However, potential plan participants are often overwhelmed with strategies, complicated financial terms and the onslaught of negative information from the media. As a result, people who know they should be doing something, throw their hands up in frustration saying “I’ll get around to looking into that retirement plan some day.” As with weight loss, that’s not a good strategy.

Automation is the Key to Sticking to a Retirement Savings Plan

Adding an automatic enrollment and automatic escalation feature to a retirement plan is the financial equivalent to the ideal wellness program that I mentioned earlier where everything is done for you. Instead of having to make intimidating decisions about what percentage to defer, where to invest the contributions, when and how much to increase their deferral, and what to choose as their ultimate deferral rate goal, the decision is made for them. Plus, enrollment is a snap.

Automatic enrollment and automatic escalation make it easy for employees to do the right thing for their future. However, there is a level of plan sponsor responsibility that goes into designing an automatic enrollment provision to make sure employees who are automatically enrolled are not only doing the right thing but the best thing for their retirement goals. Studies have shown that employees want more involvement from their employers with regard to their retirement planning and saving. This is why there is less than a 10% opt-out rate when an automatic enrollment/auto escalate feature is implemented in a company’s retirement plan. In one study, most employees polled felt a sense of relief when they are automatically enrolled into their company’s retirement plan.

3 Biggest Automatic Enrollment Mistakes

With this in mind, it is important to remember that employees believe their employer is going to do what is right for them. Therefore, employers need to avoid the three biggest mistakes with regards to automatic enrollment design.

1. Starting Too Low

Implementing an automatic enrollment program at anything less than 5% is a disservice to employees. Because your employees believe you are going to do what is in their best interest, they will view the auto enrollment design as being good enough. So if you start the automatic enrollment at 3% with no annual increase, it will most likely stay that way. If you are truly committed to helping employees prepare to retire on time and with dignity, everyone can agree that 3% just isn’t enough. Furthermore, research shows that the participation rate for employees making less than $30,000 a year is 80% regardless of whether the initial deferral rate is 2% or 6%.

2. Not Using Automatic Escalation

If employers want their employees to reach their retirement goals, it is imperative they reach a saving level of 12-15%. Starting automatic enrollment anywhere between 5-7% and then increasing that 1-2% per year until the deferral rate is between the desired rate of 12-15% is a healthy design.

3. Not Including Current Employees Who Aren’t Contributing to the Plan

When adopting an automatic enrollment provision, one of the choices employers have to make is who the provision will affect. Too often employers exclude current employees because they are afraid of a little push back. My question is why would you not include your most loyal employees, especially if there is a company match to the plan? These employees are just as deserving, if not more deserving, than new employees to take advantage of their company’s retirement plan.

Many employers are afraid of employee push back with regard to the implementation of an automatic enrollment feature. The fact of the matter is that 95% of companies polled with automatic enrollment said the perceived negative effect wasn’t nearly as bad as they thought it would be and that the benefits far outweighed any perceived negative reaction.

While we can’t set people up on an automatic exercise program to help them with their physical health, we can help set them up for financial success by implementing a well-designed retirement plan with an automatic enrollment provision.