A majority of employers offer automatic enrollment and escalation features in 401(k) plans to help workers increase their savings and retirement readiness, but some employers still choose not to. Understanding why employers opt not to can help benefit advisers work with clients to choose appropriate plans and, in some cases, even automatic features that address client concerns.
Almost two-thirds (64%) of employers surveyed by Aon Hewitt in December 2014 cited the cost of employer match as a reason they do not automatically enroll newly eligible employees in their 401(k) plan, while 36% cited concern about employee reaction to payroll deductions.
See related: Top five 401(k) plan trends for 2015
Even employers that do implement auto enrollment are tepid about embedding auto-escalation with it. Nearly half (46%) of employers surveyed cited concern over a potentially negative employee reaction as a barrier to embedding automatic escalation with automatic enrollment.
But Rob Austin, director of retirement research at Aon Hewitt says employer fears about negative feedback may be overly cautious.
We asked employees a few years back how they would feel if their employer would increase the automatic enrollment default rate and a majority of them said they really wouldnt mind and that they would actually like it, he says.
Nearly a third of employers surveyed said they opted not to implement auto enrollment because of the cost of plan administration for potentially small balances in the plan.
I think this is a very valid concern for companies with high turn-over rates, says Austin. If you bring somebody into the plan at a fairly modest rate and they stay with the company only for a couple of months and accumulate a balance of maybe $500, you havent really done them any favors when you talk about cashing that out and charging them fees.
Addressing employer concerns
Advisers are uniquely positioned to validate these employer concerns and then offer options to address them.
The gold standard would be to bring employees in at a robust rate, even above the employer match threshold, but obviously there are costs associated with that. So, a happy medium would be to bring people into the plan, maybe below the match level, but have them automatically over time get to the spot where theyre going to receive the full amount of company matching contributions and maybe even go higher, says Austin.
This resonates a lot with employers, because in essence what youre saying is Lets not devote too much money to our lowest-service employees because they typically have the highest turnover. But, rather, lets reward people who have been with our organization for a longer period of time, he says. It helps make the cost equation work a little better.
Most employers (70%) surveyed do automatically enroll their newly eligible employees into their defined contribution plans, and 29% of employers automatically enroll participants in the plan at a savings rate that is at or above the company match threshold. Another 27% of employers said they automatically enroll individuals below the full match rate, but automatically escalate contributions over time so that workers will eventually be saving enough to receive the full company match.
"In the past, employers automatically enrolled workers into 401(k) plans at low rates and workers often wouldn't increase their contributions enough to reach the full company matchto the detriment of their retirement savings," says Austin. "Because many employers gauge the success of their plan by the number of workers saving enough to receive the full match, they understand that they need to give workers an added boost by either starting them off at a more robust savings rate or automatically escalating contributions over time up to, or beyond the match threshold.
That extra savings, he says, can have a remarkable impact on workers' long-term savings outlook.
See related: Hatch presses small employers to offer 401(k)s
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