When it comes to automatic features of retirement plans, auto-escalation has been the ugly stepchild, so to speak, to auto-enrollment for years now.
But as employers become increasingly aware and concerned about the retirement crisis that could plague many of their employees down the road, retirement advisers are hoping to push auto-escalation of 401(k)s as the solution - and push them hard. But while there's desire by the industry, it could be an uphill battle.
According to a study of more than 250 plan sponsors released in October by Transamerica Retirement Solutions, only auto-enrollment increased out of the two tactics in 2013. Forty-eight percent of 401(k) plan sponsors surveyed enacted auto enrollment, a number up 45% from the last survey in 2012. But of those, 31% chose to implement auto-escalation, an essentially stagnant number compared to the 30% of respondents from 2012.
"That [number] is good, but I think it needs to be better," says Laura Gaynor, vice president and new business-corporate plans practice leader at Transamerica. "I think in time we'll see more."
She says that with so many clients already favoring auto-enrollment "one of the first things I do when I'm talking about plan design [to clients] is I say, 'You're halfway there, but you need to put escalation in there.'"
Anecdotally, she says most of her employer clients either plan on doing auto-escalation soon or have confirmed that they're doing it soon. Statistically, however, the company's survey shows only 34% of respondents are considering implementing it.
Transamerica's survey consisted of plan sponsors with 1,000 employees or more and Gaynor emphasizes while it may take time, she thinks the industry will definitely see more and more employers adopting auto-increases in the future.
For smaller employers, automatic features are not as popular. Still though, advisers in the space are just as eager as Gaynor to increase their use. Gerald Wernette is a principal at Rehmann Financial in Farmington Hills, Mich. He roughly estimates that of his company's 1,400 small to medium-sized retirement plans, about 20% have enacted auto-enrollment and only 20% of those have moved forward with auto-escalation.
"I do think it's a good thing," Wernette says about the value of auto-escalation. "My whole vantage point rests in behavioral science and looking at how the average employee looks at the overall concept of retirement savings. ... If you kind of stand back and look at it from a pure human behavior perspective of what it's going to take to save an adequate amount, the [auto-escalation] concept hits a home run.
"It's badly needed and I frankly feel the statistics speak for themselves - when you look at employers that implement auto-enrollment, and auto-escalation along with that, and you look at the numbers of people who opt out versus how those things improve the overall savings rates and plans, it's kind of a no-brainer. Almost, why isn't it a mandatory thing?"
He says for many of the clients he represents, the question of implementing an automatic tactic comes down mostly to cost. The employers may have just recently brought back matching to their 401(k)s if they halted it during the recession, or simply look at the numbers and think they can't make the contribution.
But he says his theory is, "if you're going to have a 401(k) plan, you should just have auto-enrollment and auto-escalation. I frankly wouldn't have a problem if it was built into the law, if things change down the road, if that was one of those changes."
'It's right'
For Wernette, the first place he starts when talking with clients skeptical of the concept is the philosophy that "this partly falls in [the category of]doing what's right for society as a whole." And so he asks his clients, "Do you feel it's right for people to have enough income to retire?"
Gaynor echoes this sentiment, saying that plan sponsors need to do "everything that the law allows you to do," because otherwise, people aren't going to be ready for retirement.
There's of course the concern circling around this topic in the industry that there will be employees who feel these concepts somehow do infringe on their rights or that they'll perceive their employer as crossing some personal boundaries financially.
Wernette says he hears this some from his smaller clients, though cost still is the No. 1 factor. But Jan Jacobson, senior counsel on retirement policy at the American Benefits Council dispels this as a factor with larger employers. Her members, which include some of the biggest companies, from Pfizer Inc. to Wal-Mart Stores Inc., don't really seem worried about that.
"There's a pretty broad realization that a lot of participants who don't participate in plans, it's not because they've actively chosen not to, it's because they haven't taken the time to participate. Since the participants can opt out, I've never heard from any of our members any objections like that," Jacobson explains.
Age old
Another reason advisers can bring to the table to justify the value of auto-escalation is the aging workforce. Joe Ready, a member of the SPARK Institute's board and director of Wells Fargo's Institutional Retirement and Trust, says that when you hear "it will cost too much" from the benefits committee or CFO, there's actually a financially sound retort for advisers to respond with - essentially, if you don't do this, your employees won't retire and will age in the job.
"We've started to move toward telling them that if your employees haven't saved enough for retirement ... a lot of people are hanging on and not making room for a younger work force and keeping health care costs higher," he says.
This sort of dialogue has started to "resonate" with employers and Ready says when it does, auto-escalation and increased match have both been well received.
He says the numbers and math add up when you look at the employers' return on investment, not to mention that the doing-good concept applies here too in terms of enabling older employees to get out of the workforce and live the retirement of their dreams.
"The dialogue has definitely picked up around auto-increase and I think that's because of our industry and the media focusing on retirement security," he says. "We look at the tenure at companies that we service and the average age and tenure is increasing, so we start to talk about that."
Wernette completely agrees with this logic. "We're getting more of our clients thinking about striking a balance between doing what's right for employees and managing economics," he says.
While most advisers appreciate the value of auto-escalation, Transamerica's Gaynor does note that there are particular industries where it doesn't make as much sense.
"When you talk about plans that have a population constantly evolving, auto-enrollment itself is difficult," she says. "Manufacturing and retail are the industries where I see it as more of a challenge. Manufacturing, mostly because of the lower-paid workforce and concern about employees living paycheck to paycheck.
But even there, employers' attitudes are really changing, which is something that's great to see."
And in the end, the companies that do implement auto-escalation in Wernette's portfolio are "the ones that really believe in it and want to push their employees along and have a paternalistic attitude," he says. "It doesn't necessarily have to be the case, but with our clients we're seeing that."
AMERICANS DON'T TRUST FINANCIAL ADVICE, AS MUCH AS THEY NEED IT
Americans don't particularly trust sources of financial advice, yet many say it's something they need now more than ever. Forty-eight percent of Americans say it is hard to know which sources of financial advice can be trusted, while 46% say that more than ever, they need a trusted place to go for financial advice, according to a recent survey of 1,000 Americans conducted by TIAA-CREF, a financial services provider.
Eric Jones, senior managing director, advisory services, TIAA-CREF, attributes the growing hunger for advice to demographics. "I personally think that's due to the demographic shift we're seeing out there in America with boomers entering retirement, needing an assured source of income and really getting focused on the next phase of their lives," he says.
Nearly 40% of individuals think advice is not something they can afford, according to the survey. They feel like "there's something to it they can't reach and achieve and, in fact, most individuals involved in retirement plans generally have advice available to them or certainly guidance," says Jones. "So they're not aware of what's available to them." And more than one-third - 37% - say they don't like talking to anyone about their finances. "Getting advice, particularly as you're entering retirement, isn't a do-it-yourself project," says Jones. "There's a fair amount of mistrust out there in terms of the advice they're getting."
The lesson for plan sponsors, he believes, is to use an outside third-party advice provider for retirement plan advice. "It sets the employer up so they can tell their employees they have an objective provider - it's not them, it's not the retirement plan provider," he says. "The employees know that advice is objective and there's not an agenda behind it." - Andrea Davis, Employee Benefit News
