People won’t like being forced into a plan… It costs too much… Plan sponsors have a number of reasons for not adopting auto enrollment or automatic deferral increases in their plans. In “Seven Misconceptions about Retirement Plan Auto Features,” Moser, a consultant with RetireAdvisers Services at Pension Consultants Inc., knocks them down one by one.
Recently, an HR manager said quite firmly that people do not like to be told what to do: an excellent reason he didn’t think auto features would be right for his company, according to Moser. He also said, equally firmly, that he wanted to implement auto enrollment—but cost was holding him back.
Is this the plan sponsor’s paradox?
“That HR manager represents a large percentage of plan sponsors,” Moser tells PLANSPONSOR. “He’s not only identifying the top two objections most sponsors have about adding auto features, he’s also demonstrating a genuine level of concern about the feelings and well-being of his employees.”
It is true that people do not always want to be told what to do, but most employees don’t view auto features as “being told what to do,” Moser points out. “Survey after survey has shown that the vast majority of employees, even among those who opt out, are glad their company offers automatic enrollment,” he says.
While cost is obviously a consideration, adopting auto features may not be as expensive as some plan sponsors think, Moser says. “First of all, most of the more highly paid employees are already in the plan, so any current employees joining through auto-enrollment will tend to be those with lower salaries – and receiving correspondingly lower company matches.” In addition, using auto features for new hires only allows for a gradual increase in matching contributions, so the company can adjust over time.
Moser’s white paper raises the issue of employees “not taking responsibility” as a plan sponsor argument against auto features in a plan, but he points out that automated processes are used all the time. “From automatic payment of bills to automatic sprinkler systems, people save time and energy by not having to do the same thing over and over again ourselves,” Moser says. “It’s not about avoiding responsibility; it’s about convenience.”
People prefer an automated way of doing repetitive tasks, Moser says, as long as one essential condition is met. “They want to be in control,” he says. “As long as they know they’re still in charge and can make changes as needed, they see automatic procedures as a great benefit.”
It’s easy to apply this to retirement plans, Moser says. Employees want to decide for themselves whether or not to participate. With auto enrollment, the only difference is that once the choice is made, they must take action only if they want to opt out. “Having auto features in the plan helps employees overcome their natural tendency to procrastinate,” he says. Most workers (85%) said automatic enrollment helped them start saving earlier than they would have otherwise.
Moser points out that people already automate retirement savings. “Every paycheck, a certain amount is automatically set aside for retirement,” he says, so people don’t have to remember to request the deferral each time.
Other auto features work the same way. “With auto-escalation, people can make the decision once, either by passively allowing the default escalation to be implemented or by actively adding it to their account, and then forget about it,” Moser says. This feature allows contributions to gradually increase over time according to the schedule the participant has chosen.
Auto-rebalancing allows participants to instruct the plan’s recordkeeper to rebalance their investment allocation on a regular basis, helping to make sure their account doesn’t become overly aggressive for their risk tolerance.
“Qualified Default Investment Alternatives (QDIAs) are included as part of auto enrollment, but they can be seen as an added benefit in their own right,” Moser explains. One of the most common barriers people have to signing up for a plan—the fear of making a bad decision about how to allocate funds—is removed by using a QDIA. These investments make it possible to start saving for retirement with a diversified portfolio, and then make the decision later about how to allocate the available funds to better match age and risk tolerance.
“Statistics show that automatic enrollment can actually quadruple participation rates among lower income employees,” Moser says. The size of the contributions will determine the impact on retirement outcome, and it is true that saving 1% won’t have much effect on a person’s future retirement income.
The way to make a difference is to start contributions at a higher rate and automatically increase them over time, Moser says. “Those future resources could have a significant impact on their retirement readiness,” he says. “And the number of employees who opt out of auto-enrollment barely increases when the initial deferral rate is 6% rather than 3%.”
The effect of auto contributions and auto increases on the workforce and the bottom line can be dramatic, according to Moser. “An employee who is stressed out about finances, including retirement readiness, is less productive and less likely to stick around,” he says. “Turnover is very expensive, especially when it involves key executives, who expect and appreciate the ability to contribute to a tax-advantaged retirement plan."
If too few rank-and-file employees participate in the plan, those executives could have their contributions returned to them at the end of the year, meaning they’ll have to pay more in taxes, Moser says. Increases in participation driven by auto-enrollment can allow key executives to enjoy higher contribution limits. If they are more likely to stick around, that helps the bottom line, Moser says.
Moser recommends that plan sponsors with any doubts about how their workforce might receive auto features, or whether the features will provide a cost-effective benefit to employees and the company’s bottom line, should talk to a plan sponsor using similar features. “They can ask if that sponsor has any regrets about adding auto features to their plan and what benefits they’ve seen as a result,” he says.
“Then they should ask themselves what’s holding their own company back from implementing auto features in their plan,” Moser says. When people examine most of the common objections in the light of evidence, the choice is clear, he says. They’re going to want to add both auto enrollment and auto escalation to the plan right away.
Most plan sponsors genuinely care about their employees, Moser says, and they know automatic enrollment and automatic escalation will encourage employees to be better prepared for their future retirement. “That’s why most sponsors want to add these features to their plan,” he says. “Once they see how affordable auto features can be and realize how appreciative employees are to have these added benefits, the decision about whether or not to add auto features to the company plan can be much easier.”
“Seven Misconceptions about Retirement Plan Auto Features” is available on the website of Pension Consultants.
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