What if we concentrated a portion of our efforts in working with plan sponsors and plan participants that have employees who are not, by choice, participants in the plan? First of all, who are these nonparticipating people?
- When confronted with a stack of prospectuses at the time they initially became eligible to join the plan, they opened the first page of the prospectus and their eyes glazed over.
- They muddled through the pile of prospectuses and when they attended the enrollment meeting, hosted by you, were mind boggled by the words, standard deviation, alpha and beta ratios and ran screaming from the meeting vowing never to enroll.
- When they first joined the company during their initial period before they could initiate deferrals, no one (and we know who we are) met with them and informed them that while they could not defer yet, they could rollover assets from their previous employer now.
- They were invited to an initial enrollment meeting, declined to enroll in the plan and were never invited to attend another enrollment meeting.
What if we could address these issues by automatically enrolling these reluctant retirement plan personnel? Is this possible? It is, and it has been an option available to plan sponsors and plan advisors since 2007.
How does it work? As an employee becomes eligible, they are automatically enrolled in the plan at a pre-set contribution limit, usually pegged at 3 percent of compensation. Once they are automatically enrolled, the participant has 90 days to choose to not participate and receives a refund of their automatic deferrals.
How successful has this automatic enrollment been? A recent survey by RetirementMadeSimple, a Washington, D.C., company recently surveyed 700 participants in a number of plans across the country with the automatic enrollment alternative approach to the traditional enrollment procedure. Ninety-eight percent of those who had been automatically enrolled were still enrolled.
Who benefits from implementation of an automatic enrollment feature? The employee who, while eligible, suffers from paralysis by prospectus and never enrolls. A recent study by the Employee Benefit Research Institute (EBRI) indicates the average savings for retirement by a person age 55 or older is less than $50,000.
And while automatic enrollment at a preset level of 3 percent of compensation may not ensure a well-off retirement, you as plan advisor should consider adding an automatic increase component to the plan's automatic enrollment provision.
What is automatic increase? As your automatically enrolled employee receives an increase in their compensation, a preset percentage of that increase is automatically directed towards their already automatic preset contributions into the plan.
Who else might benefit from establishing an automatic enrollment plan? The plan sponsor and the highly compensated participants in the plan, among others, would benefit. Unless the plan has adopted a safe harbour provision, those highly compensated employee-participants are limited in their deferrals for their retirement to no more than 2 percent more than what those at a lower compensation are contributing.
If lower compensated participants are, through automatic enrollment and automatic increase provisions, contributing a higher percentage of their compensation to the plan, the contribution percentage of the highly compensated also increases and they are saving more for their retirement as well. Where would the automatically enrolled employee-participant's deferrals be directed? Stay tuned.
Colin Smith can be reached via e-mail at rr1058@aol.com.
