Are Auto-enrollment 401(k) Plans Gaining Traction?
Written By Kyle Pifher
When it comes to employee benefits, a retirement plan is something of a must for many companies. But how to get employees to contribute and the rationale for employers to want them to is something that has bubbled up as an opportunity for further exploration.
Many employers are becoming increasingly concerned about employees’ ability to save for retirement, prompting many of them to rethink their retirement benefits plan strategies and assist their employees in better preparing for retirement. Clients want to help their employees reach retirement and live a comfortable, dignified lifestyle.
We have seen an increased interest in the last few years by clients looking for ways to make saving for retirement easier and more attractive for their employees. There is a noticeable increase in employers automatically enrolling their employees and placing their contributions in a risk-based or target-date based portfolio, absent an affirmative election by the participant. This is a concept that has taken time to gain traction.
In the past, many employers felt that implementing such a provision overstepped their bounds. Now, we’re seeing this becoming the standard. We also note an increase in sponsors implementing an escalation feature, automatically increasing the contribution rate for the participant every year. In essence, what we are experiencing is a move by employers to make saving for retirement easy and worry-free for their employees by making some of the decisions that in the past have been a barrier for participation. Of course, at any time, the participant can opt out of these features.
Many plan sponsors were hesitant to implement these progressive steps because they anticipated a backlash from participants being forced into the plan. However, the participants are communicated to in advance, and are able to opt out prior to the auto deduction and anytime thereafter.
What we have found is that a very low percentage, typically 5 percent to 10 percent, will opt out. Some companies have decided not to adopt these features, particularly if they provide a matching contribution, as the company outlay will increase. However, the contributions are federally tax deductible to the employer, and these features encourage and promote retirement savings, show care and concern for the long-term savings of their employees, and help them in reaching a comfortable retirement lifestyle.
Plan sponsors who are considering auto-enrollment have a few decisions to make. First, they’ll need to decide whether the provision will affect those employees who already have met eligibility but are not currently participating, or whether it will apply only to newly hired employees. Second, they must set the deferral rate for those automatically enrolled employees. We see some clients starting out at three percent of compensation, while others have taken a more aggressive approach and have started at six percent or higher. Additionally, we have seen many employers take the next step and increase the deferral rate each year, driving a higher level of savings for their employees. Lastly, the sponsor, along with its investment advisor, will make decisions on the default fund where the monies will be invested. These are typically retirement-date based managed investments designed to become less aggressive as the participant nears retirement.
Discussing these types of plans with your consultant and determining whether this approach meets the objectives of the company can be very beneficial in helping employees effectively save for their retirement years and allowing all employees to save more.