Auto Approaches Hold Promise, Pitfalls
The argument has thus far centered on whether plan
sponsors will be held responsible for the investments
they make with pension money if employees did not choose
the fund. Still, others question whether the measure will
substantially boost enrollment, and what that cost might
be to employers and employees.
“When you subscribe to automatically enrolling
participants, you have to ask if you want to own those
investment choices,” said Erin Eddins, VP Manager of
Invesmart Advisors, and a panelist at
Plan Designs 2006
, a conference held in Chicago last week by
PLANSPONSOR
magazine.
Taking Advantage of Inertia
“If you have a 70-75% participation rate, it doesn’t
matter how much communication you have, there will be
some that won’t [participate],” said panelist Jim O’
Shaughnessey, Principal, Retirement Plans Market,
Sheridan Road Financial.
There are other ways to increasing enrollment, including
making the investment options less intimidating, perhaps
by simply offering fewer options or presenting them to
participants at different times instead of bombarding
them with all those choices all at the same time, O’
Shaughnessey said. He cited research that found after two
investment choices, participation actually dropped.
Eddins, said that so far, communication has done little
to boost participation rates, but for a small plan it
could still be an effective way to get employees signed
up.
“We are just not seeing this education translate into the
right behavior,” she said, but added that “automatic
enrollment is not the end of the story. It still requires
employer dedication. You still need to talk to these
people,” she added. She suggested a consultation period
6-months after enrollment to see if participants are
pleased.
Eddins tacked on several caveats to automatic enrollment
that warn against a measure that will “take advantage of
people’s inertia.” If employers choose the route of auto
enrollment, she said they will also have to decide if and
when they should increase contributions, and if that
should also happen without the approval of the plan
participant, because they are unlikely to make any
changes to their investment options.
John Mott, PRP, Vice President, Investments at Smith
Barney, stood against using auto enrollment as a default
way to increase enrollment and told attendees “educate
until you can’t educate anymore.” One tactic Mott
advocated was easy enrollment, in which the number of
choices participants must make in order to join a plan is
limited (see also
Principal: New
Enrollment Form Helps Drive Participant Saving
).
Recruitment Cost
Educating employees about retirement plans and why they
should be in one, and what decisions they should make
once they are enrolled is expensive, Eddins said.
But auto enrollment is a far from cheap alternative. Mott
contended that “auto enrollment increases the cost
dramatically for a company, and said that “some companies
don’t want to do that,” speaking about the increased
amount of money companies must pay into plans and the
administrative duties that come along with having more
participants, as well as fiduciary concerns.
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