Perhaps no provision in the Pension Protection Act of 2006 (PPA) has been as enthusiastically received as that of automatic enrollment.
Roughly one in four respondents to PLANSPONSOR's 2007 Defined Contribution Survey had already embraced the concept—and that was prior to the January 1, 2008, effective date of the automatic enrollment safe harbor provisions. While the PPA provided several key points of clarity on the design (key among them, preemption of state wage garnishment laws and the articulation of a qualified default investment alternative), automatic enrollment has been used by employers for more than two decades for one simple reason—
At least, it works when it comes to getting workers into the retirement plan. Studies consistently have shown that getting workers into the plan does not alter their initial inertia, and that, once in, the deferral savings rate and investment funds chosen by the plan sponsor are seldom modified by participants. That is one reason that the PPA tied the concept of contribution acceleration to the automatic enrollment safe harbor. That is helpful for participants who never managed to get around to filling out that enrollment form. However, as automatic enrollment designs take hold, there are indications that workers who previously might have been inclined to fill out the form might well decide now—either consciously or unconsciously—
to let the "system" enroll them instead. As a consequence, participants who otherwise might have started at 6% would, under the PPA safe harbor, not achieve that level of deferral for several years.
This month's KnowHow emphasizes the importance of revisiting those "automatic" choices as soon as possible—and following up with those defaulted participants to make sure that they are maximizing their savings opportunity.
As always, we look forward to your comments and feedback. —Nevin E. Adams, JD