Workplace retirement plans play a major role in helping Americans reach their retirement goals. Access to a retirement plan, though, is really just a starting point. The next step is nudging employees to save, save and save some more, particularly for employees who may have scaled back how much they were saving due to the economic squeeze caused by the pandemic. Fortunately, retirement plan automatic features are an effective way to boost savings for plan participants — and there are real advantages for your plan sponsor clients as well.
Automatic enrollment is growing
Auto-enrollment is rising in popularity, and it’s easy to understand why. It allows eligible employees to automatically contribute to the retirement plan at a specific percentage of pay. Although there’s an opt-out feature, the good news is only 10% of employees choose not to enroll. Even better? After implementation of auto-enrollment, the vast majority of plan participants (up to 85%, according to T. Rowe Price) stay enrolled.
Advantages for plan sponsors
Beyond those benefits, auto-enrollment has pros for your plan sponsor clients:
Increased participation and higher contribution rates: These factors may favorably affect a sponsor’s nondiscrimination testing results, allowing owners and highly compensated employees to contribute more to their retirement savings plan.
Streamlined and standardized onboarding process for new employees: By reducing paper-based workflows, employers can efficiently onboard new employees.
Simplified selection of appropriate investments, particularly target-date fund investments: This simplification often fulfills qualified default investment alternative (QDIA) objectives, providing safe harbor protections for plan fiduciaries.
Encouragement for employees on the road to retirement: When employees can afford to retire, it’s good for them and the business’s financial resources. Encouraging employees to save also helps foster a culture of loyalty, morale, and productivity, MetLife found.
Potential to qualify for a tax credit of up to $500 for three years: This benefit comes courtesy of a provision in the
Battling inertia
Automatic deferral helps plan participants incrementally bump up their contribution rates until they meet a predetermined level. The minimum recommended ceiling is 10%. Plan sponsors can set the percentage by which a participant’s elective deferral will increase each year (1% is most common) until it reaches a set ceiling.
Auto-deferral escalation combats retirement savers’ inertia. According to T. Rowe Price, participants presented with an opt-out for auto-deferral escalation adopted at a rate of 65%, compared with an adoption rate of 12% for those presented with a choice to opt in. Plus, increasing deferral percentages encourages participants to realize the full extent of their employer matching contribution possibilities—no more leaving free money on the table!
Reenrollment: A do-over opportunity
The reenrollment option gives employees the chance to modify existing 401(k) investment choices into the plan’s QDIA (typically a target-date fund). Participants receive a notification that their existing assets and future contributions will be directed to the QDIA on a specified date, unless they opt out. For participants who aren’t confident in choosing investments or lack the time to manage them, reenrollment is a great way to reset and ensure that they’re repositioned to meet their retirement goals.
When implemented correctly, reenrollment allows plan sponsors to strengthen their fiduciary standing by gaining favorable QDIA safe harbor protections.
Help your clients take advantage
So, how can you help your plan sponsor clients pull the right levers and take full advantage of the benefits of auto features? Here are three steps you can take:
1) Review your book of business. Identify plans that aren’t adopting auto features, paying particular attention to those with the following warning signs:
- Low or declining participation rates, counting eligible versus participating employees with an account balance
- Low or declining savings rates (the
- Low average account balances (the
- Plans recently needing corrective distributions due to nondiscrimination testing failure (As a result of this failure, highly compensated employees have a portion of their elective deferrals returned)
- Companies with multiple locations, which typically have enrollment and engagement challenges
- Lack of QDIA or target-date funds in the plan offering
2) Make the case. Next, present the auto features to clients who display the warning signs. You might highlight how a retirement plan benefit can be a key factor when trying to attract and retain talented employees. Other points to consider include:
- Auto enrollment: The standard auto-enrollment rate is 3%, a palatable starting point for many new adopters. For clients whose plans have already adopted this feature, suggest bumping the default rate up to 6%.
- Auto-deferral escalation: Clients may consider using a higher annual increase rate (2% rather than 1%). As auto-deferral escalation ceiling rates climb, encourage clients to aim higher with the annual increase cap amount.
- Reenrollment: Discuss whether the plan’s QDIA is appropriate with respect to the plan goals and objectives, emphasizing the importance of reviewing it periodically using a documented process.
3) Connect with service providers. Discuss auto features with your clients’ vendors (such as recordkeepers and third-party administrators). That way, you can determine whether the features are feasible and how they might affect the employer’s annual nondiscrimination testing and matching contribution budgets.
Give ’em a nudge
There isn’t one perfect solution to foster retirement plan engagement. But, as evidenced by the research, giving retirement savers a nudge to act on their financial futures can really pay off for participants and sponsors alike.
This article previously appeared in the Commonwealth Business Review, a publication of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
