Making automatic plan designs better
Illustration by Steve Wacksman
A growing number of plans have embraced automatic enrollment—more than half of the largest plans, according to most industry trend surveys, in fact. However, most that have adopted that design feature thus far appear to have done so in a relatively conservative manner. Most start at the 3% deferral rate called for in the Pension Protection Act’s (PPA) safe harbor, most increment the subsequent deferral increases at the 1% pace referenced by that same PPA, and nearly all appear to be investing those deferrals in a qualified default investment alternative, or QDIA. Most, however, continue to adopt automatic enrollment on a prospective basis—in effect providing a good starting place for new workers, and assuming that current nonparticipants have made an affirmative decision not to participate.
Regardless of whether, or how, your plan has adopted automatic enrollment, by most accounts, it produces a mixed result, certainly in the short term. Plans that adopt automatic enrollment generally enjoy higher rates of participation, but it is not uncommon to see average deferral rates drop as these participants are defaulted in at rates lower than most of those who choose to participate affirmatively select.
This month’s Know How is directed to participants who have been automatically enrolled and who, therefore, may not have paid much attention to the details of your plan, and how they can better take advantage of its design to help achieve a financially satisfying retirement.
As for plan sponsors, there are things you can do to help:
Auto-enroll workers at higher rates, perhaps as high as the level at which they will receive the full company match. Sure, the Pension Protection Act calls for 3% as a minimum to be eligible for its safe harbor, but there’s no law/rule that says you can’t go higher.Auto-enroll all workers, not just new hires. Do you really care more for the people you just hired than those who have devoted years of loyal service?Remind all participants of the importance of actively saving for retirement. It may be a bit counterintuitive to try to reach automatically enrolled participants who didn’t even take the time/expend the energy to fill out an enrollment form, but it’s important. By most measures, workers who save only to the level of the company match won’t have saved enough to provide a financially secure retirement. As always, I look forward to your comments and feedback.
Nevin E. Adams