SURVEY SAYS: Why Don't More Plans Use Auto Enrollment?
This week we asked readers why more plans hadn’t embraced the concept.
Nearly 27% of this week’s respondents opted for the ever-popular “more than one of the above” option, with most of these indicating that the dominating concerns were about cost and small balances (and the cost OF small balances), concerns about the fiduciary issues of setting a default deferral rate and investment choices, and worries about running afoul of state wage garnishment laws.
However, despite the plethora of choices, a robust 22% opted for “none of the above,” and most in this group seemed to feel that either (a) it was the participant’s responsibility or (b) it wasn’t the employer’s responsibility – or both. As one reader said, “The ‘other’ reason in our case is our desire to become a less paternalistic employer. For years we have been telling our employees that they are mature adults responsible for their own actions, one of which is properly planning for retirement.” Another said, “Who are we to be telling our employees how to spend their pay? A large population of our company is service people that have relatively low wages. We don’t know all of their individual challenges of providing for themselves and their families and how to best use their pay. If we tell them where to put their money, they’ll tell us to pay them extra to put it there.”
Still another said, “One that I would like to add is ’employee relations.’ Most people don’t like you making decisions about their money. Employers can and must provide retirement plan education, but the decision to enroll should be the employee’s choice.” “Feels like ‘big brother,'” observed another. “Employees also should enroll in the company sponsored medical plan and disability plan…should we automatically enroll them in those plans too?” A provider noted, “We had a number of employers who said they wanted this option, and then backed off when the employees complained about what they said were unauthorized deductions.” However, one reader noted, “…our Board has never felt it was right for our company culture even though we were dreadfully failing discrimination testing. However, after this year’s testing and another round of corrective distributions, we are finally doing another analysis of our plan design, and guess what is at the top of the list to analyze – of course, automatic enrollments.”
The third most popular response ( 19.5% ) was a concern about the cost/administration of small balances. As one reader noted, “There is definitely concern about the cost/administrative implications of small deferral balances, especially because in our case, we have a maintenance fee that each participant account is charged at $9 per quarter, and we wouldn’t want a small default contribution to be eaten up quickly by this charge.” Another observed, “I have nightmares about answering the question ‘Ccan I have my money back?’ Cost concerns transcended those administrative costs, as well. One reader noted, concerns about “cost, not of small accounts, but of the additional people who will get the 3% match.”
The next most “popular” explanation was the one that pending legislation is supposed to help resolve. Still, less than 8% of this week’s respondents noted “fiduciary concerns about picking default investments and deferral rates,” and fewer than 5% expressed concerns about potential conflicts with state wage garnishment laws – though one respondent said, “We hadn’t even considered potential conflicts with state wage garnishment laws, but now that you mention it….”
As for the rest of the categories, about 8% said they just hadn’t gotten around to implementing it yet (one said, “Just don’t need the additional hassles right now,” and another said, “It’s not like the people it would impact are pushing us to do this, so we remain focused on more urgent matters”) , roughly 5% cited that plan sponsors didn’t see the need, and another 5% said they didn’t have the need. One noted, “Haven’t implemented because we already get almost a 95% participation rate so we haven’t viewed it as a tool we need to implement.”
A number of auto-enrollment adherents responded favorably. One noted, “We did it five years ago, and it is the best thing we’ve done for the plan. We had 93% participation before and now we’re up to 97%.”
But there were other perspectives as well. One said, “We have been following auto enrollment for about two years and still don’t feel comfortable offering it yet…. I’m concerned about the small balances and would prefer a way to remove and refund the money to a participant who isn’t happy. I want to continue encouraging our participants to pay attention to their investment diversification and don’t think auto enrollment, which would entail dumping participants who didn’t respond in a default option, would help in that area.”
“It’s my opinion that easy enrollment is a better approach,” offered another. “The participant simply signs the pre-selected deferral rate and investment option election form which includes an authorization for the employer to set up the participant in that manner.” Another offered an interesting approach: “About five years ago, we changed our plan to allow enrollment ‘upon hire.’ We have gotten 98% participation by putting the 401k enrollment forms in with the other employment forms. If they don’t turn it in, I bug them for it until they finally relent and give me the form to get rid of me.”
But this week’s Editor’s Choice goes to the reader who noted, “My concern is that these same people, who wouldn’t take action to prepare for retirement, will take a lot of action (with their attorneys) if the retirement we prepare for them without their input does not satisfy their future retirement desires. Of course, if we do nothing, and they thus have nothing, they (and their attorneys) would have sued anyway saying we never told them the dire implications of doing nothing. As usual, only the attorneys will have a secure retirement.”
Thanks to everyone who participated in our survey!
C and part of D
(c) They are concerned about the administrative implications of small deferral balances. Many employees simply don't read what they are given. Sponsors are concerned about employee backlash when deferrals 'they weren't informed about' start and then they can't get them back.
(d) They are concerned about the fiduciary responsibility for picking default investment funds (they aren't worried about fiduciary concerns around deferral rates)
Our reasoning for not offering automatic enrollment (although I implemented it at my previous company 5 years ago) would be closest to (c). There is an additional administrative complication of dealing with employees who want a refund because they failed to Opt Out in time. Our employees are geographic dispersion in small pockets in every state across the country (20,000 employees) in very small locations with little to no HR or management, which makes benefits communications with employees difficult.
G- We did it 5 yrs ago and it is the best thing we've done for the plan. We had 93% participation before and now we're up to 97%. Any one who opts out is a fool since we have a 4% match with immediate vesting.
Given the conservative culture at my organization we've adopted a wait and see attitude about it. C, D, & E are our issues. Nevertheless, it's my opinion that easy enrollment is a better approach. The participant simply signs the pre-selected deferral rate and investment option election form which includes an authorization for the employer to set-up the participant in that manner.
I would have to say h more than one; they would be f more pressing issues, g haven't gotten around to it and if and when I do get to it then I would say d concerned about fiduciary issues. With our workforce though, I would be more concerned that we would start taking the deductions, someone would notice it on his or her check and come unglued because "we didn't tell him or her" we were doing this. We get a lot of that, usually closely following the realization that they didn't do something we told them they had to do. Of course, it's never their fault. Just don't need the additional hassles right now.
(i) - None of the Above. We haven't implemented because we already get almost a 95% participation rate so we haven't viewed it as a tool we need to implement. I would also be concerned about employee impact and communications, ensuring that employees understand it's coming out if they don't make an election to stop it. I don't need that grief.
We have been following auto enrollment for about 2 years and still don't feel comfortable offering it yet. Our participation rates are good. I would pick (c) because I'm concerned about the small balances and would prefer a way to remove and refund the money to a participant who isn't happy. I would also pick (d). While I'm used to the idea of picking a default fund for our forfeiture accounts, I don't feel as comfortable picking default funds in this scenario. We had so much inertia in our plan from changing vendors twice in the last 3 years and mapping funds, that we did an Affirmative Election this past spring and greatly improved our plans' investment mix. I want to continue encouraging our participants to be pay attention to their investment diversification and don't think auto enrollment, which would entail dumping participants who didn't respond in a default option, would help in that area. We could default them to one of our premixed portfolios, but I'm still not comfortable with making another decision for the participant by enrolling them without an affirmative election. We try to make our participants make as many of their own decisions as possible. I can also pick (e), as we are all over the US.
I think A - they don't see the benefits - but that is partly the provider's fault. It is essential to educate on what features will help the plan sponsor and participants, and clearly automatic enrollment will help both groups. It is in the best interest of the provider as well - for more than just the reason of increased assets. Being a provider ourselves, it is difficult to get internal powers that be past the liability aspect - and educating the providers on how to sell the feature is the greatest education opportunity of them all.
Some plan sponsors dismiss auto enrollment because of concerns over state law conflicts. More often, they dismiss it as an option because they don't like the "big brother" aspects of it. I think they need to see examples of where it worked without negative employee fallout. This is why we are considering holding a seminar where plan sponsors with auto enrollment talk about how their programs have worked.
Answer: Fear Factor: (d) they are concerned about the fiduciary responsibility for picking default investment funds and deferral rates
XXX is afraid of employee backlash - and unfortunately is taking the approach to be ruled by fear. As one who manages the 401(k) plan, it's frustrating that our employees need the benefit but are being denied the opportunity because management is shortsighted.
(i) other....turnover in retail is so high and pay is relatively low...think a lot of set-ups followed by elections out would occur...also creates need for additional communications about a year after date of hire to remind employees of the automatic enrollment so they aren't surprised. One more comment...feels like "big brother"...employees also should enroll in the company sponsored medical plan and disability plan...should we automatically enroll them in those plans too? Generally think this is a potential employee relations nightmare.
I would have to say H. A combination of D and E, but mostly D. There is also a concept of there needs to be some responsibility on the part of the employees to take the steps to save.
I can't speak for others, but we have not implemented automatic deductions because of (d), (e), and (i). The "other" reason in our case is our desire to become a less paternalistic employer. For years we have been telling our employees that they are mature adults responsible for their own actions, one of which is properly planning for retirement. We have annual 401(k) enrollment and performance meetings and give them access to free investment advisers on company paid time. To force them to participate (even if they can proactively opt out) seems counter-intuitive to our goal of letting them make their own decisions.
Survey: c - cost, not of small accounts but of the additional people who will get the 3% match. I hope to introduce automatic enrollment again when our general fund is in better shape.
In response to your survey, if they had any sense at all in the litigious world in which we live, the plans would be worried about E most and then D.
First of all I would have to elect (i) other as our Board has never felt it was right for our company culture even though we were dreadfully failing discrimination testing. However, after this year's testing and another round of corrective distributions, we are finally doing another analysis of our plan design and guess what is at the top of the list to analyze - of course, automatic enrollments.
Isn't life interesting?
My answer is (i). Who are we to be telling our employees how to spend their pay? A large population of our company is service people that have relatively low wages. We don't know all of their individual challenges of providing for themselves and their families and how to best use their pay. If we tell them where to put their money, they'll tell us to pay them extra to put it there. The culture supports empowering employees to take action as opposed to a company directive to save. For those who tell us to worry about aged employees that won't be able to retire: Our workforce is generally young and we don't expect people to be with us for their entire career, so we don't face that issue.
Plus, why would an employer sign up for all the liability associated with automatic enrollment?
c - Most definitely. I am a provider to the "small" marketplace. The small balances and issues surrounding the administrative headaches of having someone defer a few times and then realize "I didn't really want to do that."
Maybe partly fear of the above, as well, but that is the answer I get most regularly.
We have five 401k plans in our corporation of 2200+ employees.
We do not have automatic enrollment in four of the plans because they cover employees who also have DB plans, which were in effect when we first offered the 401k plans. (Three of them are in union plants which would have been difficult to negotiate the DB plan out.)
The fifth plan has automatic enrollment (and a higher match than the other four plans) because those employees do not have a DB plan. This was a fairly recent start up plant.
The logic is that if they have a DB plan, they can afford to view 401k savings as more optional?
g) As a company who is implementing the program this year, I think this is the main reason it wasn't done sooner. However, a) was an accompanying reason until we came too close to failing the nondiscrimination test the past couple of years. Many communication efforts over the past two years have had little impact on convincing new employees, and current NHCEs, to participate.
I am one who has always believed in self responsibility, but am now convinced that many people want someone to do it for them. My concern is that these same people, who wouldn't take action to prepare for retirement, will take a lot of action (with their attorneys) if the retirement we prepare for them without their input does not satisfy their future retirement desires. Of course, if we do nothing, and they thus have nothing, they (and their attorneys) would have sued anyway saying we never told them the dire implications of doing nothing. As usual, only the attorneys will have a secure retirement.
D and I
Some of our employees count on the company to make investment and deferral decisions and then take it as gospel, never changing. I'm concerned that employees will not increase their automatic deferral. Of course, on the other hand, many don't change from a 0% deferral, so anything would be better than nothing.
My answer is (h) - more than one. While we do see the benefits to adding auto enrollment, we are slightly concerned (d) about the fiduciary responsibility for picking default investment funds and deferral rates and (e) about potential conflicts with state wage garnishment laws. However, primarily we are (c) concerned about the cost/administrative implications of small deferral balances and (i) other - concerned about a significant increase in the cost of our company match if we start forcing people into the plan. We recently enhanced our match and have launched a communications campaign to get people to enroll on their own, but we are strongly leaning against going the added step towards auto enrollment.
My former employer, a large hospital/clinic, implemented auto enrollment. Our biggest concern was picking default investments. Our choice was a dated Retirement fund i.e., 2020, 2030, etc. We were not as concerned with small balances as we were with seeing how many participants stayed at the 2% default rate despite repeated education efforts. Since our match was suspended, we did not feel comfortable with automatically increasing deferral rates by 1% per year until a max of say 5% but we probably would have done it if we were providing a match.
(c) They are concerned about the cost/administrative implications of small deferral balances, in our company the split is approximately 25% full time regular employees and 75% seasonal. All ready it is more painful than it should be with the small accounts, and most of those employees treat their account as if it were a savings account instead of a retirement. Although many of them return year after year they use the 401k as if it were a bank account for savings. Most of them don't seem to care, or grasp the idea of a retirement account and seem to be quite willing to pay the early withdrawal penalty when they leave and cash it out every year.
"H" made up of "B" - when really looked at they don't need the benefits due in part by "I" none of the above. The biggest problem I've seen in the Automatic Enrollment plans we've helped administer over the last few years has been:
1 - Participant "A" didn't really understand what was going to happen when they joined this company and after a few pay checks went by realized that "A" was making contributions to a 401(k) plan. Upon that realization "A" said they didn't want to participate and wanted their money back - not possible, so they got mad and stopped making contributions telling everyone in the company what jerks the HR department is and how bad the retirement plan is. As the cost of maintaining a retirement plan is partly determined on average account balance we've ended up with some large plans with very small average account balances.
2 - At first it works fine then more people are hired and the client forgets to start the automatic deductions - what now, you have an eligible participant that has never made an Automatic contribution to the plan and you don't have any document requesting that contributions are not made.
We have considered automatic enrollment as an option; however, we have a difficult time passing the testing requirements as it is; our HCEs get money back every year because our lower wage earners aren't contributing as much. Using automatic enrollment would only make this problem more serious.
H- Haven't got around to it yet. It's not like the people it would impact are pushing us to do this, so we remain focused on more urgent matters. Of course, it will become a problem when you have a bunch of people who want to retire but are financially unable to do so- but that is a problem for another day.....
(I) none of the above.
Employers can and must provide retirement plan education, but the decision to enroll should be the employee's choice.
My answer is probably (h), because many of your options apply. We've given this issue a lot of thought in the past, and decided NOT to do it.
Let me expand...
(c) There is definitely concern about the cost/administrative implications of small deferral balances, especially because in our case, we have a maintenance fee that each participant account is charged at $9 per quarter, and we wouldn't want a small default contribution to be eaten up quickly by this charge.
(d) the concern about the fiduciary responsibility for picking default investment funds and deferral rates is a concern too - less of a concern than the other reasons because we have several conservative options, including a Stable Value Fund which would be the default, and 24-hour access for participants to change their investment options any time they want... but then, communication/education about their options is the real issue here (we feel we do communicate it well, but there are always people who don't pay attention to what you send/tell them).
(e) We hadn't even considered potential conflicts with state wage garnishment laws, but now that you mention it...
(i) Other... Probably our main reason for not doing automatic enrollment in the retirement plan is the administrative hassle - we feel we would most likely receive many complaints as soon as the money starts coming out of their pay, and that would require reversing or stopping the pay deduction with little or no money being deposited to the retirement plan in the end anyway (and then we're back to the issue in answer C).
On the flip side, the primary reason TO DO the auto enrollment is for the benefit of HCE's. Auto enrolling everyone, even if only at 2% to 4% of pay, could help the ADP/ACP tests to come out more favorably for HCE's, assuming that most of the enrollments actually stick.
Considering that all of the management team responsible for making the final decision about auto enrollment are HCE's themselves, it's a wonder they don't insist on it, but they recognize that the fiduciary and administrative issues involved with doing it outweigh their personal stake in it.
Sorry for such a long-winded response, but this happened to be a hot-button issue for us awhile back, so the train of thought just kept flowing out of me! 🙂
(c) They are concerned about the cost/administrative implications of small deferral balances
I've got to go with (i) on this one. We had a number of employers who said they wanted this option, and then backed off when the employees complained about what they said were unauthorized deductions.
I believe the answer is (F) they have more pressing concerns/haven't thought about it. Because of this (G) they just haven't gotten around to it yet, because of (A) they don't see the benefits. But with all the positive studies I believe it will more towards the top of their priorities. This is what transpired at my company and we have experienced 96% enrollment since we implemented this feature.
My answer to the question of the day is (a) they don't see the benefits. Will you publish the results of your informal pole?
I guess our answer is closest to (a) we don't see the benefits. With our immediate vesting of the match (safe harbor plan design) we target our enrollment efforts to those employees that have shown a commitment to the organization.
My response is (g) haven't got around to it yet. Our enrollment throughout the company is very high, over 90%, so auto enrollment has not been a compelling topic. As you might imagine with this high participation level, we don't need auto enrollment to help us pass the non-discrimination tests. I do support the concept and I suspect we will put it in sometime within the next 12 to 18 months, despite our heavily unionized population.
(g) Haven't got around to it yet......someday, maybe?
c - Small account administration. I have nightmares about answering the question "can I have my money back?"
and
d - Fiduciary
and
f - I suppose there are always more pressing issues; we have participation over 80%.
Our 401k provider constantly pushes auto-enrollment for our plan, and I constantly push back. For one, I feel that everyone's earnings are their own to do with as they please - your employer should not force you to save your own money into a retirement plan. Many entry-level workers live hand-to-mouth, especially in big cities, and cannot afford to save. Many of those same workers are in their 20's and don't see the need to start saving. Also, the withholding money out of a paycheck without the employee's consent is an issue in some states.
None of the above. About five years ago we changed our plan to allow enrollment "upon hire". We have gotten 98% participation by putting the 401k enrollment forms in with the other employment forms. If they don't turn it in, I bug them for it until they finally relent and give me the form to get rid of me. We have a "savings account" in the 401k that they can put their money in until they decide which funds they want. That way, they don't have to give me the excuse that "they don't have time to decide where to put it". I just tell them to start deducting it immediately, and then re-allocate it on-line when they decide where they want it to go. This method seems to work well.
f & g and maybe i.
There is also the problem of lost participants with small balances, especially when the worker may be leaving the country to head home to south of the border etc. It is a real pain to payout a beneficiary who does not have an EIN or SSN, doesn't speak English.
(i) Other: I think it applies to the Defined Contribution plan "Field of Dreams": if you legislate, they will come.
b) Don't need the benefits.
We're at 89% participation.
And our plan does not offer loans.
Thanks for the question. In my role as a consultant to plan sponsors I find some areas of confusion and some common areas for the slowness in adopting auto plan features.
The auto plans being proposed today are not the same as the auto plans offered several years ago, which never made much of an impression.
Those plans typically had two features. 1) Employees were automatically enrolled in the plan at some fixed rate of deferral (often 3%) unless they actively opted out; and 2) their investments were typically defaulted into the money market or stable value option.
In those days, many plan sponsors, and I might add, a good deal of advisers and attorneys counseled against these features for reasons (c) and (d) in your list.
These features alone did not function very successfully and many people reveled in pointing out their failures -- a favorite was to point to the failure of many default enrolled employees to change up from the 3% or to select more appropriate investments.
Today's total auto plan however has many more features. The work of Benartzi and Thaler and the recognition by the industry that the old ways aren't working (Note comments by Fred Reish in your magazine and comments by the DOL that they encourage these features.) support the adoption of a bundling of auto features to make 401(k) plans more successful. These features include auto enrollment at a predefined percentage, coupled with auto increase at specific intervals. Employees can set the level of auto increase making this a much more participatory exercise. Moreover, today's plan typically defaults into a targeted maturity fund which has the advantage of taking the participant's age into consideration.
These funds, while far from perfect are generally better managed than a participant will do on his or her own, selecting from an open menu of mutual funds.
Still, today I mostly hear objections (c) and (d) but both are aimed at the auto plans of the past. As Mr. Reish and others have repeatedly pointed out, a plan sponsor has the fiduciary responsibility for the plan investments whether they leave the ultimate allocation choice up to the participant or not; might as well take a hand in getting some of it right. And the state wage law issue while still technically in conflict would most likely be resolved in favor of the auto plans the first time anyone (and who would) attempted to bring it to court.
While we can all point out minor imperfections in the programs, the ultimate goal of these plans are to provide adequate retirement benefits. Ask yourself, if you're doing that better with or without these features. I suggest that most of us will conclude the auto plan features make a plan better able to provide adequate retirement benefits for the largest number of employees.
In our case, in locations where the cost of living is high many of our employees live pay check to paycheck with relatively low levels of discretionary income, we don't think company sponsored big-brotherism will be perceived as a positive.
Our 401(k) Plan is a not widely perceived as a great benefit. There is no matching contribution. Plan expenses are paid for from the assets of the Plan. Our employees are geographically dispersed and employee meetings are not practical so we have some unusual communication challenges.
It's a combination, really. Most of the plan sponsors that I work with simply (b) don't need the benefits. Of course, these are also plans that limit the amount of money that their HCEs can contribute, and therefore are preventing some of the lower-paid HCEs (just above the comp threshold) from hitting the 402(g) limit. They simply don't see auto-enrollment as a possible solution here (no matter how much we've tried to convince them otherwise).
More of a concern, though, is (d) - fiduciary responsibility. It's not the employer's job to tell an employee that they must contribute to their plan, and they must invest in a specific fund. How does the employer know that they are not independently wealthy enough to fund their retirement? If the employer does not offer a match, then many people see no reason to contribute at all, and they don't want the added hassle of having to 'opt out.'
And lets not forget (i) other - the added cost associated for a company that offers matching contributions. There are a lot of companies that are cutting match altogether. Some employers may not want to force themselves into this situation, which can be seen as taking away a benefit from those that specifically requested it, as a direct result of the plan sponsors forcing it on others that didn't consider it in the first place.
In my experience, plans that do not have auto enrollment have higher contribution rates, too. If you auto enroll someone at 3%, then they will probably be too lazy to change it in the future (since they were too lazy to elect it to begin with). Otherwise, they may have enrolled themselves as 5%. Picking a good default rate is tough.
I think it is a combination of (c) they are concerned about the cost/administrative implications of small deferral balances, (d) they are concerned about the fiduciary responsibility for picking default investment funds and deferral rates.
There may even be concern about more $$ devoted to match.