Tag Archives: automatic enrollment

You heard it before, American workers still aren’t saving

Moen-AlexA recent survey shows that Americans are saving more overall, but less in employer-sponsored retirement plans. So how can sponsors and administrators of defined contribution plans solve this? Easy:

1. Use an auto-enrollment design with a default of no less than 6%.
2. If you provide a match, stretch the match to at least 7% or 8% of pay.
3. Consider adding a nonelective (i.e., profit-sharing) contribution.
4. Reenroll all non-savers every six years at the default rate.

Some experts suggest that automatic plan features are the best way to change behavior. This is most likely true, but a New York University (NYU) study suggests that while auto-enrollment gets people into the plan, it is not ensuring that they build secure retirements. All too often employers select the default rate of 3%, which, according to researchers, reduces long-term retirement savings for those who would have enrolled at a higher rate. As consultants, we see this example frequently—a young employee enters the plan automatically and three years later is still at 3%, even though the plan is matching deferral rates up to 6%. Out of sight and out of mind can be dangerous for young employees. The NYU study states that 80% of retirement plans include an employer match contribution, and of those plans, almost half of employees are not maximizing the match. That means that at least half of workers do get it; at the right deferral rate, there is free money on the table. With this in mind, consider an example to illustrate the savings impact of a new match contribution formula: currently, the match is 50% of the first 6% (or maximum of 3% of pay). Why not match 100% of the first 1%, then 25% of the next 8%? In this scenario, we could argue that half of the employee population would defer 9% of pay to get the 3% match. This would produce a total annual contribution of 12% of pay per year, without the employer matching anymore compensation than it did in the current formula.

Figure 1: Match Formulas

Figure 1

To emphasize the impact of different deferral rates on an employee’s account balance at retirement, using the proposed new match formula, see the chart below:

Figure 2: Potential Savings

Figure 2

A recent Employee Benefits Research Institute Retirement Confidence Survey asked workers what action they would take if they were automatically enrolled into their retirement plans, deferring 6%. Nearly three-quarters, 74%, responded that they would stay at that rate or increase their contribution rates. This survey addressing employee behavior offers strong incentive for a 6% auto-enrollment rate. In my opinion, plan sponsors should incorporate this type of employee behavioral analysis into the plan design process. A current client has maintained participation rates near 90%, with a 6% auto-enrollment rate. And of those deferring, 84% defer at a rate greater than or equal to 6%.

While matching contributions are an important feature, the researchers argue a more beneficial tool for a plan is a general (i.e., nonelective) contribution. And if the employer can afford to, and the plan is designed for the population correctly, the nonelective contribution can provide a more substantial retirement benefit. There are, of course, trade-offs, and with nonelective contributions comes stricter annual testing.

Something else to think about—reenrolling all current employees when the plan adds the auto-enrollment design. I have witnessed firsthand the success of such an endeavor with another Milliman client who did this 18 months ago. The plan went from 63% participation to 97%—and has maintained that level.

As an administrator of defined contribution plans, I know automatic arrangements can be difficult to administer, but the recent relaxation by the Internal Revenue Service (IRS) of correction rules (Revenue Procedure 2015-28), and the evidence provided by the surveys mentioned above, simplify the decision. If employers enroll new employees in plans automatically, they are clearly likely to stay, and the automatic arrangement often becomes the obvious choice. But the rate needs to be high enough to be worthwhile. Plan sponsors must evaluate the goals of their plans. Is the objective to simply have higher participation, satisfy tax incentive rules, and ensure that workers save something toward retirement? Or is it to truly build a serious retirement benefit for employees? In that likely case, additional studies of the employee population and their saving behavior must be incorporated into plan designs.

Retirement plan enrollment considerations

Employers are constantly seeking new ways to get employees enrolled in their retirement plans. This Plan Adviser article quotes Milliman’s Gerald Erickson and Jinnie Olson discussing how automatic plan designs and targeted communication strategies can affect the enrollment of participants especially Millennials.

Here is an excerpt:

When it comes to automatic plan design, says Gerald Erickson, a principal at Milliman Inc. in Minneapolis, the adviser community obviously supports these features. Still, it is important to acknowledge that while popular opinion claims auto plans are the next logical step in improving participant outcomes, “from a plan sponsor and an administrator/recordkeeper perspective, automatic plans are not easy to administrate.”

There’s a lot that goes on behind the scenes, he says, and that may include some mistakes. “I think it’s important for people to understand that it’s not as easy as just getting people to automatically go in the plan and think that’s the end of it. It does require a lot of work from the plan sponsor side, and it does require a lot of work from the recordkeeping/administrator side.”

Plan advisers should be wary of potential complications when designing their automatic features. Most retirement plan advisers are “looking at what makes the biggest impact in getting people in the plan,” Erickson says, which for Millennials may lead them to look at Roth options. “If you add a Roth feature to the plan,” he points out, Millennials that are in a lower tax bracket now can essentially “marginalize their tax hit by taking advantage of the tax-free distribution on the back end.”

Speaking for Millennials, Olson says, “We’re really the first generation that’s going to have to fund our own retirement, rather than relying on the typical defined benefit [DB] plan that’s losing popularity, and it can be really intimidating for people to hang onto enrollment packets for a year while you try to meet the eligibility requirements.”

…Advisers can help make an overwhelming amount of information more accessible for all participants, Olson says. “You want to be able to give that information to everybody but in a way that everyone has the opportunity to get through it and understand what it is,” she says. “Rather than a 15-page enrollment packet, maybe you pare it down to two pages, summarizing everything, but then give them the opportunity to look into it more later.”

A major change to correction procedures provides much needed relief for sponsors

Jakobe-KariOn April 2, the Internal Revenue Service (IRS) rolled out major changes to the correction methods related to failure to implement automatic enrollment or to having missed participant-elected deferral changes.

Previously, the prescribed correction in the Employee Plans Compliance Resolution System (EPCRS) was for the employer to make up 50% of the missed deferrals and 100% of the match, plus earnings on both. This was often a windfall for participants and penalty for sponsors that deterred many from adopting auto-enroll provisions in their plans.

There are now two new safe harbor corrections: one for plans with auto-enroll provisions, another for faulty elective deferrals. The general guideline of the new correction methods are as follows:

For plans with auto-enroll features:
• If the failure is found within nine months of the plan year-end in which the auto-enroll should have begun:
o Start the deferral immediately
o Send a notice of the failure to the participant
o 100% of any missed match is made up and adjusted for earnings

• If the failure is found outside the nine-month window following the plan year-end, the old procedure remains in place.

For other elective deferral changes that are not completed as requested by the participant, if the failure is found within three months:
• Start the deferral immediately
• Send a notice of the failure to the participant
• 100% of any missed match is made up and adjusted for earnings

If found after three months from the date the change was to be effective:
• Start the deferral immediately
• Send a notice of the failure to the participant
• 100% of any missed match is made up and adjusted for earnings and the participant must receive a qualified nonelective contribution (QNEC) in the amount of 25% of the missed deferral, plus earnings

For a more detailed explanation on the new regulations, see the recent Client Action Bulletin published by Milliman.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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Auto enrollment errors are expensive

Auto enrollment is becoming more popular with employers that sponsor defined contribution (DC) plans. This feature can help increase plan participation, enhance retirement outcomes among participants, and improve discrimination testing results. On the other hand, administrative oversights can prove costly.

In this article, Milliman’s Kari Jakobe identifies two common errors administrators commit related to auto enrollment. She also provides two examples showing the monetary effects that result from these mistakes.

Here is an excerpt from the article:

The two most common failures for auto enrollment plans are: 1) failure to notify employees of the plan provision, and 2) failure to enact the auto enrollment and withhold deferrals on a timely basis, or at all. These failures nearly always result from bad data—incorrect date of hire on a payroll file, for example, a miscoded rehire, or a keying error when entering deferral changes into a payroll system. The possibilities are numerous and the corrections can be costly.

In general, the Internal Revenue Service (IRS) has prescribed corrective action for missed deferrals with less than nine months remaining in the year, requiring the plan sponsor to deposit:

• 50% of missed deferrals
• 100% of missed match
• Earnings at a reasonable interest rate

Consider the scenario shown in Figure 1 of missed deferrals that are due to failure to start the withholding on a timely basis, for a client with a 4% auto enrollment rate and a match formula of 100% up to a maximum of 6% deferred.

Auto enrollment_figure 1

The full correction of $8,937.00 is funded by the employer (not the employee) in the form of a qualified non-elective contribution (QNEC). That means the money is 100% vested immediately and does not count against the 402(g) limit for the participant. Most plan sponsors will choose to communicate the specifics about these corrections via correspondence letters to the affected participants and should be prepared to field an array of resulting questions.

Retirement crisis in the United States: What can be done?

Since the global financial crisis of 2008, the U.S. population has struggled to recover and/or grow retirement savings. Employers providing defined benefit (DB) plans face overwhelming funding expenses, driven by increased life expectancy, stock market fluctuations, and low interest rates. The latter two factors, resulting from the severe recession and unpredictable economic environment experienced since then, have also severely impacted employers’ ability to fund defined contribution (DC) plans.

Kelly Greene, of the Wall Street Journal, recently discussed this issue and cited the Employee Benefit Research Institute’s latest retirement confidence survey. This study states that the percentage of U.S. workers demonstrating little to no confidence regarding the adequacy of their retirement funds is at an all-time high. Only 13% of workers surveyed report being very confident they have enough saved for retirement and 38% report some confidence in their preparedness. Five years ago, those two figures totaled approximately 70% of workers surveyed. Employers and employees need to work together to remedy this situation. Depending on the design of the plan, the answer could be a defined benefit plan, a defined contribution plan, or a strategic combination of the two.

Possible solutions can be categorized from basic to more radical. One proposal is to convert traditional pension plans to cash balance plans rather than merely freezing them. However, the advantage of this strategy is still diminished by the significant issue of longer life expectancies. Better stock performance and, hopefully, within the next few years, better interest rates will relieve some pressure on benefit obligation expenses. Discussing the results of the Milliman Pension Funding Study released March 25, John Ehrhardt stated that “pension funding status will continue to be tied to interest rates” and “until interest rates move favorably, the pension funding deficit is likely to endure.”

A middle ground solution might be to introduce a profit sharing element to the retirement plan package. There are a few drawbacks to a profit sharing plan, mostly increased administration, but the positives in many cases outweigh the negatives. Profit sharing plans are discretionary and, theoretically, self-funding. These plans tie employee incentives to company growth and form a strong partnership between employers and their employees. With the stock market showing some improvement and the economy demonstrating strengths (Wall Street Journal), companies could, over time, see an upswing in business. Plan sponsors can seize that opportunity and distribute some of those profits to employees, utilizing performance accountability measurements. Other, straightforward strategies include implementing auto enrollment processes and increasing employee retirement plan education. Employees need guidance. They are not professional investors. Companies can meet the challenges of today’s retirement savings environment and take pride in assisting their employees in this venture.

Auto-enrollment by the numbers

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…

401K enrollment

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:

What’s so automatic about auto enrollment?

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:

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Your 401(k) plan has auto-enrollment, now what?

Jeff_MarzinskyThere 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