Defined contribution plan sponsors who have yet to get on board with auto-enrollment -- a trend that began more than a decade ago -- are now in the minority. One study published last week in Science magazine found that 56% auto-enroll participants -- up sharply from 19% back in 2005. The study by behavioral economists Shlomo Benartzi and Richard Thayler also found that a slim majority (51%) of sponsors has embraced auto-escalation of deferral amounts.
While the numbers are moving in the right direction, how far should plan advisers go to encourage the hold-outs to get on board, or push those sponsors that have taken a timid initial approach get more aggressive?
“Most employers started out too low, because there was a lot of fear of the unknown,” says Chad Larsen, president of Moreton Retirement Planners. Most of his clients have progressed, however, with some encouragement from him. Many today will peg the default initial contribution default rate to the base level of their matching contribution, often 3%. “Going forward I think we’ll see much more in the 5%-6% range,” he says. The larger plans are in the vanguard.
Show the evidence
One key to moving the needle, according to Pensionmark CEO Troy G. Hammond, is to make your case with empirical data, instead of merely expressing an opinion. “Studies have shown no real difference between a 3% or 6% start rate, and very low drop-out rates up to 10% deferral,” he says.
Yet some employers willing to embrace auto-enrollment remain skittish about auto-increases, and either balk entirely, or stick with baby-step 1% auto-increases. “But again,” says Hammond, “with empirical evidence and the trust we have built up, we have had success” in moving sponsors forward. “We typically are advising increasing the deferral at 2% per year versus the standard 1%, based on our studies of behavioral finance and the average tenure of a typical employee.”
Larsen says most of his clients are sticking to 1% auto-increases. “I’m comfortable with that” if that’s as far as sponsors want to go, he says. “It depends on the employer. If they start with a 3% [auto-enroll default] and it takes three years to get to 6%” with 1% annual auto-increases, “that’s an improvement” for many participants.
Raising the match ceiling
In his broader effort to help employers get employees to increase employee deferrals, Larsen is encouraging some clients who have a 100% match on the first 3% to spur employees to defer more by switching to, for example, a 50% match on up to 8% of employee deferral. “We can project for employers how they will spend the same amount” -- yet cause much higher employee deferrals as they stretch to gain that last match dollar.
“We all know we need to get the employee up to 12%, between the deferral and the match.”
A recent report by Reuters revived a 2009 Urban Institute study that concluded that match rates are lower at companies that have auto-enrollment, than those that do not. While the validity of study has been challenged, it points to an important consideration in working with plan sponsors. “Philosophically, one of the worst things companies can do is put in auto-enrollment, and hope employees won’t take advantage of it,” says Larsen.
“We have heard of that, but not seen it,” adds Hammond. “We have seen employers embrace the increase in cost knowing that they are significantly assisting their employees in achieving better outcomes at retirement.”
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