7 Misconceptions About Retirement Plan Auto Features
having contributions returned to them at the end of the year
because not enough non-highly-compensated workers are
participating. Auto enrollment can increase the participation
rate of low-to-moderate income employees from 20% up
to 80%6.
shows that only 4% more employees opt out of autoenrollment if the starting deferral rate is 6% instead of
3%9. Plus, if an employer match is included, nearly twice
as many participants (61% as opposed to 32%) reach an
overall savings rate of 11% or more.
More participation from your rank and file employees means
higher limits on contributions for your key executives – just
another reason for them to stay with you and not look for
greener pastures elsewhere.
It’s clear that employees overwhelmingly support both
automatic enrollment and automatic escalation, and as a
result companies are increasingly adding these features to
their plans. Automatic features are a simple, cost-effective
way to improve employee satisfaction, and adding these
features to your retirement plan can make it easier for you to
retain highly paid key executives by ensuring they can take
full advantage of their tax-favored retirement contributions.
MISCONCEPTION
5
It will be a nightmare trying to
administer all these new small
accounts when employees leave
the company.
The Department of Labor recognizes that keeping track of
all your previous employees and administering the accounts
created for them through auto-enrollment would be very labor
intensive. That’s why the regulations released in 2004 allow
automatic distributions and rollovers7. If an account balance
is under $1,000, the account can be automatically cashed
out and the funds sent to the participant. If the balance is
between $1,000 and $5,000, the money can be automatically
rolled over to a default IRA custodian.
MISCONCEPTION
6
Establishing a default investment
for new auto-enrolled accounts
increases our fiduciary liability.
Increased risk of fiduciary liability was a
legitimate concern in the past, but not since the enacting of
the Pension Protection Act of 2006 (PPA). The PPA says
participants “will be deemed to have exercised control over
assets in his or her account if, in the absence of investment
directions from the participant, the plan invests in a qualified
default investment alternative.”8
As long as the default investment passes certain qualifying
conditions, the liability for the choice of that investment
remains with the participant, not the plan sponsor.
MISCONCEPTION
7
Automatically enrolling employees
won’t really have much impact on
their retirement readiness.
It’s true that saving 1% toward retirement
won’t have much of an impact on a person’s future retirement
income, so why not start at a higher rate instead and add
automatic annual increases? A recent study by The Principal
For more information about how automatic features might benefit your
company or to add these features to your plan, please contact Pension
Consultants at 417-889-4918.
See ”Plan Sponsor Survey: Structuring DC Plan Automatic Features to Pump
Up Retirement Savings” by the Defined Contribution Institutional Investment
Association (DCIIA), March 11, 2011.
1
See the November 7, 2007 study by Harris Interactive on behalf of Retirement
Made Simpler, available at www.retirementmadesimpler.org/Library/FINAL%20
RMS%20Topline%20Report%2011-5-07.pdf
2
See “The Business Case for 401(k) Automatic Enrollment”, http://www.
retirementmadesimpler.org/resourcesandresearch/businesscaseforauto401ks.shtml
3
See the November 7, 2007 study by Harris Interactive on behalf of Retirement
Made Simpler, available at www.retirementmadesimpler.org/Library/FINAL%20
RMS%20Topline%20Report%2011-5-07.pdf
4
For more ways your plan choices impact your bottom line, see the February 27,
2014 blog, “The Impact of Financial Stress on Workforce Productivity”, at http://
pension-consultants.com/2014/02/the-impact-of-financial-stress-on-workforceproductivity/
5
See Orszag, Peter and Rodriguez, Eric. “Retirement Security for Latinos: Bolstering
Coverage, Savings and Adequacy.” RSP Policy Brief No. 2005-7 (July). Retirement
Security Project and National Council of La Raza, Washington DC. See also
“The Ariel-Schwab Black Paper,” published by Ariel Mutual Funds and Charles
Schwab. October 2007.
6
See The Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA) and Department of Labor (DOL) regulations released in 2004, as
referenced in “Auto 401(k) Plan Continue to Evolve – Addressing Small Account
Concerns”, http://www.retirementmadesimpler.org/ResourcesAndResearch/
Auto401kPlansContinueToEvolve.shtml
7
See the Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules
and Regulations / Part III / Department of Labor / Employee Benefits Security
Administration / 29 CFR P