Last week we asked you what you’re doing to encourage employees to enroll in your company’s 401(k) plan. The majority of those who voted in the poll reported using auto-enrollment and/or auto-escalation to encourage participants to participate in their 401(k) plans. We think auto-enrollment is an effective tactic too. Of course, even 100% participation in a 401(k) plan might not be considered a success if plan participants aren’t contributing enough. So this week we’re wondering…
With the end of the year coming many 401(k) plan sponsors are gearing up for open enrollment. Now is the time to get your employees motivated to enroll and contribute to your company’s 401(k) plan. But what are the most effective ways to do that? It seems simple, but in difficult times, when many Americans are facing tough trade-offs to make ends meet, it can be hard to get employees to plan for the future. So we’re asking you:
If you are a plan sponsor of a defined contribution (DC) retirement plan, I’m sure you have heard the term “automatic enrollment” and I’m sure you have been encouraged by your consultants or advisors to consider it for your DC plan. If you haven’t already added it, you may be sitting there saying to yourself: “Automatic enrollment, why not? It’s automatic, therefore it will save time, improve plan participation, and allow us to focus on other priorities. Done. Simple.” If you have already added it, I’m sure you’re reading that last statement and saying to yourself, “Yes, I thought the same thing.”
I’m not writing to put the kibosh on this design. Quite the contrary. Automatic enrollment has its place and I have recommended it to clients when the pros and cons of adding automatic enrollment were evaluated in the context of the overall design and goal of the employer. But let me be clear on this: unless you are an employee of an auto-enrollment plan that takes absolutely no initiative, there is nothing automatic about auto enrollment.
As a plan sponsor, it is crucial to identify goals. Whether it is improving participation, improving discrimination results, or perhaps improving the benefits to a key set of employees, the goals identified will help to guide design considerations. And if one of these considerations is automatic enrollment, you should be aware of the following:
There has been a good deal of discussion on success measures for auto-enrollment, and we’ve previously established that by adding auto-enrollment a plan sponsor can immediately make its plan appear to have 100% participation. But is that enough?
Consider the basic fact that participation in a 401(k) plan is only one hurdle in making a retirement plan successful. Is a 3% contribution rate good? It may or may not be. In our recent informal online survey, the results indicated that the most popular rates, as shown in the pie chart below, tend to be those that are just enough to maximize the employer matching contribution, followed by 10% of salary
The practice of automatic enrollment in a 401(k) has been proven to up the number of people saving for retirement in companies. Still, any time you start tinkering with people’s take-home pay it’s going to be a touchy subject so we thought we’d ask you…
The 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.