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Are automatic enrollment plans a success?

April 12th, 2011 Leave a comment Go to comments

By Jeff Marzinsky

Jeff_MarzinskyThe short answer to the question is yes. Many studies have indeed indicated that adding automatic enrollment features to a plan helps to facilitate participation rates going up significantly. From that perspective it is certainly a success.

However, sponsors and their employees should not be lulled into a false sense of security that automatic enrollment features will guarantee a retirement nest egg sufficient to meet all of the needs of retirement.

Take, for example, a 40-year-old employee with a salary of $40,000 automatically enrolled at 3% (without factoring in employer contributions) for the next 25 years. For simplicity, let’s say that, with an 8% annual return and no increases in salary, that person may have somewhere in the range of $100,000 at retirement. Is that enough to last 20-30 more years, coupled with Social Security? Maybe, maybe not. However when you look at the fact that it may amount to around $500 a month, after-taxes, without factoring in Social Security or other retirement benefits, it’s unlikely to cover much in the way of basic needs.

But it also raises the question:  Is 3% a good level?

  • Auto enrollment with auto-escalation may provide a better option – getting employees into the plan and gradually increasing their deferrals each year.

Sponsors need to consider not only their rates of participation, but also to factor in some other measures in determining the success of automatic enrollment and their retirement programs:

  • Are there other employer-provided retirement benefit plans?
  • Are employees provided with other types of communications and educational opportunities to help them assess their needs versus their savings?
  • Is there some type of “gap” analysis provided to employees so they can see what the 3% savings rate over their careers might be worth at retirement (versus what they actually might need)?
  • Are sponsors looking at their employee demographics and retirement benefit “gaps” at a global level to see how their plan features are helping employees to meet target retirement benefit levels?

The Defined Contribution Institutional Investment Association (DCIIA) recently published a report with more details regarding their study of automatic enrollment plans. Read it here.

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