Feature
retirement planning by adjusting retirement savings increases
to coincide with bonuses or salary raises. As Meghan points
out, “It makes retirement planning a bit easier and it takes the
thinking out of it. When you use automatic increases with
salary increases, employees never miss the money because
it never hit their paycheck to begin with.”
The advantage is clear for participants, but what about for
the employer? A retirement plan exists primarily to attract
and retain talent, and there is evidence that employees will
even accept lower compensation if they receive better benefits,
including higher company match to their retirement plan.
In our experience employers and plan fiduciaries are deeply
committed to their employees and providing them a path to
a secure retirement. To this end, automatic features have a
measurable positive impact to retirement readiness. Using
the data of the largest recordkeeper, Meghan points out the
benefits of auto-enroll: “in plans that use auto-enrollment,
participation rate is about 84%. In plans that don’t use
auto-enrollment, participation rate is 52%: clearly a huge
impact.” Going beyond enrollment, automatic increases
also advances aggregate savings rates. In Meghan’s words,
“auto-enrollment gets them in the door and then you need
auto increase to get them to save at the rate they’ll need to
fund their retirement.”
Finally, there are also strong financial incentives for a
company to provide solid retirement options. Specifically,
employers want their employees to retire well. Why?
Productivity and cost effectiveness benefit from workforce
planning. “In the long run, if you have a workforce that is
prepared for retirement, there is a bigger benefit. People
who aren’t prepared for retirement will work longer and
they may not necessarily want to. So, now they’re coming
to work and they don’t have the best attitude about it. Older
employees have higher health care costs to the company.
You’ll bring in newer employees with fresh ideas who are
motivated to be there.”
Why not use automatic features?
No action is without costs, and there are some downsides to
using automatic features. For the employer, there are clear
direct costs involved when adding more employees into a
retirement plan with a company match. Plan sponsors may be
hesitant to increase the amount of dollars needed dedicate to
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company matching funds. Furthermore, the plan committees
and named fiduciaries can potentially open themselves to
additional liability, depending on the decisions being made.
For the participants, automatic enrollment rates are generally
too low for long term retirement security, and may create
a false sense of security. “Many employees don’t have the
financial background to make the proper decisions about their
retirement. So when their employer automatically enrolls
the employee at the default 3% deferral rate, they think it’s
the right amount.”
I’ve decided to use automatic features. What
now?
If you do decide to implement automatic features, it can
now be accomplished quite painlessly. Most experienced
recordkeepers and service providers should be able to turn
the feature on with minimal input from the employer, but
there are some features to consider first. For example, we
recommend having a dialogue with key vendors, including
the payroll vendor to discuss which IT changes may be
necessary to implement the service.
Implementing auto-enroll features for new and existing
employees might spur your plan committee to reconsider
your retirement plan design prior to the switch. For example,
company match amounts are typically set to match 100%
of the employee’s salary deferrals, up to 3% of their salary.
Instead of that matching structure, a plan could easily encourage
increased savings by switching to a 50% company match
for the first 6% of company salary. Participant retirement
outcomes can be promoted with some savvy plan design
without changing the cost to the employer.
Finally, employers should consider is an education campaign
for new and existing employees about the new options.
Many companies only turn on automatic features for new
employees – fresh hires, but this is a good opportunity to
look at existing employees who aren’t participating or those
that aren’t participating at a significant level. Anecdotally,
Fidelity notes that employers who automatically enroll
employees who are saving less than 4% into a 6% default
experience very low opt-out rates. In other words, employees
are generally ok with increasing their deferral rate to 6%,
but they have limited attention to make active changes to
their retirement planning.