SURVEY SAYS: Will the New Automatic Enrollment Rules Have an Impact?

August 10, 2006 ( - Much of the initial focus on the new pension bill has been (rightfully, I think) focused on its impact on defined benefit plans.

There are also a number of defined contribution provisions; removing EGTRRA’s “sunset,” extending and indexing the Saver’s Credit, setting out some new conditions (and setting aside some old ones) on offering investment advice, and providing some much-anticipated structures for automated enrollment designs.  

This week, I asked readers what kind of impact they expected to result from that new automatic enrollment clarity.

Since the passage of the bill, headlines have proclaimed the great, good, positive tidings that this provision would have on defined contribution plan savings rates.   Even ahead of the legislation, the design has an enviable track record in terms of boosting participation rates, and a number of this week’s respondents could hardly wait to get started.  “The new legislation is huge, ” offered one respondent.  “I believe automatic enrollment will become the default on the plans we work on.   We will be deciding not to do it instead of thinking about doing it.”  One reader who wasn’t affected – but would obviously like to be – said, “As a government plan in a state that has laws precluding automatic enrollment, it will not immediately help us.   But if my prediction of a huge impact is correct, maybe our state will recognize the importance of automatic enrollment and change our laws.”   Another who saw a huge impact said, “Unfortunately, PPA will not help the plan I work for. It is a non-electing (ERISA) church plan.”

Still, as enthusiastic as this contingent was, only about 28% of this week’s respondents said that the impact of the new legislation would be “huge” – and perhaps half of these came from providers (including a number of plan sponsors for provider programs).

Not that that perspective should be discounted – providers generally interact with multiple plan sponsors – but in compiling this week’s results, I was struck by how cautious plan sponsors were about the implications of combining automatic enrollment (widely favored) with contribution acceleration.   Most plan sponsor respondents this week were inclined to acknowledge the potential positive impact of the provision – indeed, a plurality of respondents (38%) anticipated a modest impact from the legislation, for a variety of reasons.   For one thing, the decision isn’t just about the perspective of the Department of Labor.   As one reader noted, “I think eventually that the PPA (Pension Protection Act) can have a huge impact on auto-enrollment, but selecting a default investment is a more difficult decision than many realize, so it will take time for plans to work through this decision. Clearly the “easy” decision, default investing in a money market fund, has been taken off the table as inappropriate for many participants. That leaves an investment with an equity component, which can (and will at times) lose money.   How do you explain to your employees that you took money from their paychecks without their explicit permission, invested it for them, but now they have less money than they had before?”

Another “modest impact” response came from a respondent who said that impact would result “more from the extra publicity that will accompany the law than the law’s own impact.”

“Recordkeeping systems are still developing software to do this well …until those issues are worked out, advisors will be reluctant to make any mistakes recommending it to their clients, even though it’s been ‘OK’d,'” noted another.   Indeed, a number of readers (who were not advisors) saw a prominent role for advisors in these decisions going forward, including the respondent who predicted, “Watch for many more plans to bring in fee-based fiduciary advisors to guide plans through this complicated decision.”

Despite those complexities, only about 5% thought the legislation would serve to discourage adoption of automatic program designs, while only 10% said it was tough to generalize a result in view of the variables – administrative, expense, and fiduciary – involved (no respondents thought it would have no effect).   Still, as one reader noted, “While it’s hard to generalize because the impact will depend on individual plan/employer circumstances, I believe it will have at least a modest impact on automatic enrollment adoption as many companies including ours are introducing automatic enrollment.”    

Among those who saw the legislation as a detriment was the reader who said, “I believe that the rigorous auto-increases in deferral % on an annual basis will be off-putting to employers and employees,” said one.   “I like the concept, but I’d rather do a better job of reminding employees to check their deferral % when they receive a pay increase rather than auto-increase it and have them waive that increase retroactively, which then impacts administration of the plan.”   This, by the way, from a plan sponsor with a very high participation rate at present.

class=”normal”>Finally, nearly one-in-five readers managed to remind us all that it’s a 900+ page piece of legislation that is less than two weeks old – and, as one reader said, “(I) still haven’t waded through the provisions.” “Just printing off the summaries to read on a plane this afternoon,” noted one.   Another said, “Unfortunately….I haven’t taken the time to read it yet.   It’s in the pile!”

Another reminded us that, while the law offers certain benefits (and imposes certain restrictions) on plans that adopt automatic provisions under the new law, it isn’t the only way to go.   One reader noted that they “still haven’t read the provisions in detail, but we currently don’t have any plans to add automatic enrollment.   We are looking forward to the DOL’s forthcoming regs on default investments as we are thinking about changing our default fund.”

A number of readers concurred with the assessment of the reader who said, “Are you kidding? I haven’t digested the info from the last survey.”

But this week’s Editor’s Choice goes to the reader who predicted that “auto-enrollment will be widely, if not 100%, adopted.”  But then said that the “real question is, will it help ultimately the savings in America?”

Thanks to everyone who participated in our survey!

Editor’s Note:   Ironically, almost exactly a year ago we asked readers “Why Don’t More Plans Use Auto Enrollment?”   You can check out the results  HERE