Getting started is only half the battle when it comes to retirement plan participation
A number of industry studies (including our own 2004 Defined Contribution Services Survey) suggest that roughly one in five employers currently has an "automatic enrollment" feature in its retirement plan. The option has been used by employers for more than two decades and, in recent months, it has enjoyed a resurgence in popularity for one obvious reason—it works.
At least it works when it comes to getting workers into the retirement plan. There are some issues with the approach. Some workers either do not want to join or cannot afford to and, while those workers certainly have an opportunity to opt out, they may fail to do so. That can leave the plan with small balances that are administratively burdensome, and represent a point of contention with workers who did not want to participate in the first place.
Just as significantly, studies 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. As a consequence, plan sponsors need to be attentive to the deferral rate—is the 2% or 3% typically chosen adequate to achieve your goals in implementing the program—as well as the default investment choice.
Regarding the latter, the traditional approach has been to invest in a money market/stable value option—ostensibly because, in the short term, it would not inflict market losses on the account of a reluctant participant. Instead, studies have shown that these participants, like participants generally, do not revisit that investment choice. As a consequence, that "short-term" investment choice becomes a long-term investment decision. Plan sponsors need to follow up with those participants and get them to revisit those decisions. Until they do, plan sponsors will have made an investment decision for that participant—and need to make sure that it is indeed in that participant's best interest.
This month's Know How emphasizes the importance of revisiting those "automatic" choices as soon as possible. As always, we look forward to your comments and feedback.