If plan sponsors are serious about getting stellar 401(k) participation rates, the evidence is stronger than ever that auto-enrollment is a powerful way to achieve it. More hold-outs are getting the message and considering taking the plunge, although only a slim majority already do.
But if the employer’s goal extends beyond merely the participation rate but to maximizing deferrals, they may also need to get a little more ambitious than the minimum 3-4% PPA safe harbor initial default contribution rate or 1% annual auto-escalation minimums. The vast majority of employers use that 1% auto-escalation amount.
Those are some of the conclusions suggested by WorldatWork/American Benefits Institute’s
Nearly 500 plan sponsors, members of WorldatWork and the American Benefits Council, ranging in size from under 100 participants to 20,000-plus, participated in the study. 50% of respondents had fewer than 2,500 employees.
Auto-escalation still rare
Regarding auto-enrollment: A slight majority (56%) now offer it, although that is probably lower among the smallest plans in the survey. But among those that do, less than half also have an auto-escalation feature. Of the 44% total that currently don’t offer auto-enrollment, 18% (of the total survey base) reported they were considering doing so.
Plans that do not include auto-escalation features typically set a higher default contribution rate slightly lower than those that do, hoping to ratchet up contribution rates automatically.
“The policy objective of increasing participation rates through automatic enrollment appears to be achieving its goal,” according to the report. For example, 37% of sponsors with auto-enrollment reported participation rates in the 80-89% range, versus only 21% of those that do not auto-enroll participants.
“To build on the successes of automatic features, additional enhancements, e.g. higher permissible default rates, may improve retirement income adequacy and coverage,” the report states.
Anecdotal evidence from advisers serving the smallest plan sponsors suggests that many just can’t get comfortable with the idea pushing employees too hard with auto-features. Bringing the topic up from time to time citing research data, not merely the adviser’s personal opinion, can sometimes win converts, they say.
Few contribute maximum
The survey’s finding that relatively few participants contribute the plan’s permitted maximum also make it clear there is plenty of communications work to be done, in conjunction with plan design optimization. In fact, little has changed since 2008 in this regard. In the latest survey, 52% of respondents reported than less than 10% of participants set aside the maximum. At the other end of the spectrum, only 6% put in at least 75% of the maximum.
Along similar lines, only 20% survey respondents report that more than 80% of their participants defer enough to get the full benefit of the employer match. This suggests that the message many participants are walking away from “free money” has not sunken in -- at least among employees who can truly afford to kick in more of their own dollars.
More investment advice
In a somewhat hopeful sign, however, the proportion of survey respondents providing investment advice services to participants has notched up to 53% from 47% in 2008. Even more encouraging from the adviser’s perspective is that two thirds of plan sponsors offering advice services use independent advisers for that purpose, up from 47% in the prior survey. (Computer models are also more popular now, included in the advice menu by 40% of plans surveyed, up from 25% in 2008.)
Only 20% of plan sponsors believe plan fee disclosures have improved the quality of participant communications. And a slightly larger proportion (22%) believe the disclosures have made communication less clear.
One final bit of research to share from the study concerns sponsors’ top criteria for choosing investment choices for the plan. “Fees” came out ahead (with 75% mentioning it as one of their top three criteria) of “expected/historical returns” (62%). Those were followed by “diversification” (51%), “risk characteristics” (47%), “investment plan services” (22%) and “reputation of company providing investments/services” (20%).
