FEATURE FOCUS – AUTO-ENROLLMENT
How it Works
When a plan sponsor adds auto-enrollment to a plan, it makes the default option for newly eligible employees to participate rather than not participate. Employees are contacted 30-90 days prior to them being eligible and given a form to opt out. If they don’t send it back but later object to payroll contributions being automatically deducted, they have up to 90 days after the first contribution to ask for that money to be sent to them, minus withholding. If the new participant does not choose their investments, their contributions go into a Qualified Default Investment Alternative (QDIA) such as a target date fund, an investment model or a balanced fund which they can reallocate later if they choose. Initial contribution rates are often set at 2% or 3%, but may be set higher. About 50% of plans use auto-escalation of contributions at the rate of 1% per year to very gradually increase employee savings.
How Popular is It?
About 62% of large 401(k) plans now use auto-enrollment vs. 24% of small plans. That is likely due to advisors on small plans not being proactive, not understanding the feature well and to the lower familiarity of small plan fiduciaries with auto-enrollment. The percentage of plans using auto-enrollment has steadily increased, though the growth has started to level off in the large plan market.
Why Sponsors Like It
It is no secret that many Americans are dreadfully ill-prepared for retirement. Americans, particularly Gen X and Gen Y, do not save nearly enough, even less than Millennials, who are younger. In many plans, particularly with younger or lower income workers have participation rates that are too low. Typically, with an auto-enrollment plan participation rates will jump into the mid-80% range, frequently increasing by 40% or more.
Sponsors also like the fact that as more people participate, not only are sponsors helping to provide for the future well-being of their employees to an extent they did not before, but plan expenses get spread over more plan assets, reducing the average percentage cost to participants.
Why Employees Like It
Once participants see that they can still pay their bills while contributing for their future they often have a good feeling about finally doing what they knew they ought to do but had difficulty getting started.
What auto-enrollment does is overcome the procrastination and inertia that many non-savers have, partly out of fear that having money for bills now is more important than having money for bills later and partly out of skepticism or disillusionment about their financial future, particularly among younger employees. Women and minority groups tend to have the biggest increases in participation, mainly because minorities tend not to be as familiar with financial products and are not used to saving.
Participant notice is required, both initially and annually and the plan must be amended if it does not currently allow for auto-enrollment. There are two types of auto-enrollment and they differ slightly so it should be discussed as to which makes more sense.