Auto Enrollment for 401k participants is good – paired with Auto Escalation it’s even better.
Over the past few years, we have seen a marked increase in the adoption of “auto” features in 401k plans such as auto-enrollment and auto-escalation. The concept is simple: 401k plan participation has historically been an opt-in benefit, however, we are now seeing a trend where it is becoming an opt-out benefit. There is no intent to force anything on the participant. Employees still have a choice as to whether or not they participate and what percentage to contribute to the plan.
Why is this so important?
We regularly meet with clients and prospective clients that would be more prepared for retirement, giving them more choices and a significantly higher portfolio balance had they had just started saving a little earlier or saved a little more. Did they have the means to do it? Most times the answer is yes, they either kept “meaning” to do it or didn’t realize the long term consequences of putting it off.
Statistaclly, Fidelity, one of the nations largest 401k platforms, reported in 2014 that the average balance for participants over 55 years old is only $143,300. AARP reported in 2015 that the average 60-64 year old had a balance of $234,000 – that is a 60-85% shortfall for retirement readiness by their calculations.
How does it work?
It is really not much different than what you may be used to now. Once employees meet the eligibility requirements to become participants in the plan, they are given the plan information and a form. The difference is that the form is an opt-out form as opposed to the opt-in form that employers have used in the past. Unless the employee returns the opt-out form, they will be enrolled as a participant in the plan at a base deferral percentage, often between 1% and 5%.
If auto-escalation is a feature of the plan, once per year the participants’ deferral percentage will be increased by 1%. There is typically a cap on the deferral percentage that auto escalation will increase to; often it is the maximum employer matching percentage. Of course, at any time, employees can opt out of the auto- escalation if they choose.
It’s good for the employees, but won’t they complain?
A worry we hear from plan sponsors when they are considering adding the auto features is that employees will complain or somehow feel imposed on. However, the reality is, for the vast majority of participants it is a non-issue. Moreover, participants who have been meaning to increase their percentage or those that meant to enroll and just have not made the time to fill out the current opt-in paperwork are grateful that it is taken care of for them. We have heard stories of large companies that were making the upgrade to auto features building entire call centers to handle the influx of employee questions and complaints, only to find that the calls simply never came in.
The Wall Street Journal’s Blog published a good article on the spread of auto features in retirement plans; it is worth a read and linked below. If you would like to learn more about how auto features might help your employees, we would be happy to have a conversation about our experiences and see if there may be a fit for your plan. Click here to start that conversation.