Auto Approaches Hold Promise, Pitfalls

July 5, 2006 ( - Chicago - Auto enrollment is starting to look like the primary way plan sponsors expect to increase plan participation and one of Congress' answers fending off a retiree crisis.

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.