If you’re like the majority of plan sponsors, then one of the more important goals for your plan may be to increase the rate of employee participation1. The evidence is clear that automatic enrollment, in which employees are enrolled in their company plan unless they opt out, is very effective at increasing participation rates.
In spite of how effective auto features are, many sponsors are still holding back from adopting them due to misconceptions. Below are seven common misconceptions plan sponsors have about retirement plan auto features.
Misconception 1: Our employees will resent the perceived loss of control over more of their paycheck.
The concern about upsetting your employees is the most common objection to adding auto features to a retirement plan. But according to a Harris Poll® conducted in 2007, 98% of those currently automatically enrolled agreed with the statement, “You are glad your company offers automatic enrollment.”2 And in the same poll, 79% of those who opted out of automatic enrollment still agreed with the above statement.
Misconception 2: If too many new participants join the plan, the match will become too expensive.
Adding auto features to your plan may not be as expensive as you think. Most of your higher paid employees are already in the plan and contributing aggressively, so it’s mostly the lower-paid employees who will be auto-enrolled3. As a result, the match will be based on percentages of those lower salaries only. Plus, if you start auto features just with new hires, the additional matches will be added gradually over time without causing too much of a shock to your budget.
Misconception 3: If we make everything automatic, employees won’t take responsibility for their own retirement planning.
Most workers want to start saving for retirement, but sometimes need a little help to overcome their own behavioral inertia. By adding auto features, you’re not taking responsibility away from your employees, you’re helping them to start moving in the direction they already want to go. According to the same Harris Poll® referenced earlier, 85% of workers said automatic enrollment helped them start saving earlier than they would have otherwise4.
Misconception 4: The extra work and expense to our company doesn’t help our bottom line.
Auto features can actually help make your company more profitable, especially when we consider turnover. Turnover is very expensive, particularly when it involves key executives5.
One of the benefits executives appreciate most is the ability to contribute as much as possible to a tax-advantaged retirement plan. Unfortunately, they are often frustrated and irritated by having contributions returned to them at the end of the year because not enough non-highly-compensated workers are participating. Auto enrollment can increase the participation rate of low-to-moderate income employees from 20% up to 80%6.
More participation from your rank and file employees means higher limits on contributions for your key executives – just another reason for them to stay with you and not look for greener pastures elsewhere.
Misconception 5: It will be a nightmare trying to administer all these new small accounts when employees leave the company.
The Department of Labor recognizes that keeping track of all your previous employees and administering the accounts created for them through auto-enrollment would be very labor intensive. That’s why the regulations released in 2004 allow automatic distributions and rollovers7. If an account balance is under $1,000, the account can be automatically cashed out and the funds sent to the participant. If the balance is between $1,000 and $5,000, the money can be automatically rolled over to a default IRA custodian.
Misconception 6: Establishing a default investment for new auto-enrolled accounts increases our fiduciary liability.
Increased risk of fiduciary liability was a legitimate concern in the past, but not since the enacting of the Pension Protection Act of 2006 (PPA). The PPA says participants “will be deemed to have exercised control over assets in his or her account if, in the absence of investment directions from the participant, the plan invests in a qualified default investment alternative.”8
As long as the default investment passes certain qualifying conditions, the liability for the choice of that investment remains with the participant, not the plan sponsor.
Misconception 7: Automatically enrolling employees won’t really have much impact on their retirement readiness.
It’s true that saving 1% toward retirement won’t have much of an impact on a person’s future retirement income, so why not start at a higher rate instead and add automatic annual increases? A recent study by The Principal shows that only 4% more employees opt out of auto-enrollment if the starting deferral rate is 6% instead of 3%9. Plus, if an employer match is included, nearly twice as many participants (61% as opposed to 32%) reach an overall savings rate of 11% or more.
It’s clear that employees overwhelmingly support both automatic enrollment and automatic escalation, and as a result companies are increasingly adding these features to their plans. Automatic features are a simple, cost-effective way to improve employee satisfaction, and adding these features to your retirement plan can make it easier for you to retain highly paid key executives by ensuring they can take full advantage of their tax-favored retirement contributions.
For more information about how automatic features might benefit your company or to add these features to your plan, please contact Pension Consultants at 417-889-4918.
1.See ”Plan Sponsor Survey: Structuring DC Plan Automatic Features to Pump Up Retirement Savings” by the Defined Contribution Institutional Investment Association (DCIIA), March 11, 2011.
2.See the November 7, 2007 study by Harris Interactive on behalf of Retirement Made Simpler, available at www.retirementmadesimpler.org/Library/FINAL%20RMS%20Topline%20Report%2011-5-07.pdf
3.See “The Business Case for 401(k) Automatic Enrollment”, http://www.retirementmadesimpler.org/resourcesandresearch/businesscaseforauto401ks.shtml
4.See the November 7, 2007 study by Harris Interactive on behalf of Retirement Made Simpler, available at www.retirementmadesimpler.org/Library/FINAL%20RMS%20Topline%20Report%2011-5-07.pdf
5.For more ways your plan choices impact your bottom line, see the February 27, 2014 blog, “The Impact of Financial Stress on Workforce Productivity”, at http://pension-consultants.com/2014/02/the-impact-of-financial-stress-on-workforce-productivity/
6.See Orszag, Peter and Rodriguez, Eric. “Retirement Security for Latinos: Bolstering Coverage, Savings and Adequacy.” RSP Policy Brief No. 2005-7 (July). Retirement Security Project and National Council of La Raza, Washington DC. See also “The Ariel-Schwab Black Paper,” published by Ariel Mutual Funds and Charles Schwab. October 2007.
7.See The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Department of Labor (DOL) regulations released in 2004, as referenced in “Auto 401(k) Plan Continue to Evolve – Addressing Small Account Concerns”, http://www.retirementmadesimpler.org/ResourcesAndResearch/Auto401kPlansContinueToEvolve.shtml
8.See the Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations / Part III / Department of Labor / Employee Benefits Security Administration / 29 CFR Part 2550 / Default Investment Alternatives Under Participant Directed Individual Account Plans / Final Rule, http://www.dol.gov/ebsa/regs/fedreg/final/07-5147.pdf