401(k) auto-enrollment on the rise

The ultimate cure for the 'proactive apathetic' participant

What’s the best strategy for potential savers who know they should take advantage of their employer’s 401(k) offerings, but can’t quite get their act together? Increasingly, automatic enrollment an auto-escalation plans have been helping plan sponsors boost participation rates and more seamlessly fulfill their retirement responsibilities – but it’s not the easiest endeavor in the world.

Speaking Sunday at ASPPA’s annual conference in Washington, D.C., James J. McKinney, CPC, of Retirement Strategies Inc. of Augusta, Ga., pointed out many of the trials and tribulations of the world of automatic enrollment in 401(k) plans.

And while the PPA has made stipulations and regulations for auto-enrollment a more challenging prospect (especially in the maddening raft of required notices), McKinney says the positive sign is that enrollments are also up, as a result.

“Is it working? I feel like it is,” he noted. “Three-quarters of employers who offer it say that it helps their employees save, and a third say they do it because they feel socially responsible to help their workers save for retirement.”

Primary objections, he notes, include a third of employers who feel like the system is too intrusive into workers’ lives; overall, the good news is that more than 90 percent of employers are aware of the system and might make good prospects for a discussion on adding auto-enrollment and auto-escalation features in the future.

“New employees receive a huge stack of paper and usually they’ll read the health insurance information, but nothing else,” McKinney said. “Automatic enrollment battles that apathy. And when it’s defaulted into a more appropriate investment tool, it’s a good start. When they’re in, they’ll also barely feel the auto-escalation.”

According to industry and association data, McKinney says he discovered that in 2005, only 5 percent of plans offered auto-enrollment functionality; in 2009, that number had jumped to about 42 percent, and last year, the number reached almost 49 percent.

Even more impressively, 87 percent of employees working for companies with auto-enrollment features still opt in and actively participate in the programs, versus an industry standard of only about 70 percent participation. Some 83 percent of participants who started off through auto enrollment stuck with their plan and remained active a year later, as well.

In the post-PPA climate, McKinney says that ERISA’s preemption of state anti-garnishment laws also certainly made the auto-enrollment mechanisms easier, though many sponsors still do raise fiduciary concerns, given the auto-pilot nature of the product.

“But we were also given a prescription for target-date funds and some risk-based models. QDIAs have gone from principal stable-value funds to something with more weighted components as a default.”


Three plans, three standards


The alphabet soup that is the three basic types of auto-enrollment plan (Automatic Contribution Arrangement, Eligible Automatic Contribution Arrangement and Qualified Automatic Contribution Arrangement) do present varying degrees of difficulty, but McKinney notes that pushing a sponsor for the most complex of the bunch (the QACA) will invariably produce the best long-term results for participants.

The ACA – the most basic – requires no minimum or maximum percentage of deferral as a default, while the EACA adds a 90-day “do-over” redistribution option and a six-month corrective redistribution.

QACAs tend to be loaded with features including an automatic contribution safe harbor, and mandatory deferral rates that start at 3 percent and top out at 10 percent. The QACA’s two-year vesting schedule can also serve to be a benefit for employers who tend to see more long-term commitments by their employees.

“There’s also a strange formula for matching contributions – 100 percent of the first 1 percent, and then 50 percent of the next 5 percent. And QDIAs are not necessarily required, which I find odd that it’s not an automatic feature, as it’s definitely a best practice. That matching percent from the employer, I’ve found, can be a great water cooler conversation for employees and another key to participation.”

McKinney said advisors also need to be aware of “do-it-yourself” clients who’d like to be able to establish auto-enrollment regimens but miss the important deadlines and are therefore hard to monitor: “You may want to be a little more pushy with them.”

Most importantly, plan sponsors need to be reminded that while the various notice requirements for auto-enrollment plans can seem like an annoyance, they need to be followed as closely as possible: A potential penalty of $1,100 per day can be assessed if proper notices aren’t filed.  

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