Financial literacy is not taught in schools, and a large number of people are scant aware of their own retirement savings needs. The trend in the industry to address this is the implementation of automatic enrollment into worksite retirement plans.
The problem is that a very small percentage of tax-exempt organizations have adopted automatic enrollment features. In fact, according to the 2014 Plan Sponsor Council of America 403(b) plan survey, only 16% of 403(b) plan sponsors have adopted automatic enrollment in their plans. This is less than half of the take-up rate among corporate plan sponsors.
Traditionally, tax-exempt organizations have been thought of as paternalistic toward their employees, and many provide very generous retirement savings plans. However, simply having the benefit available doesnt mean everyone takes advantage of it.
When talking to non-profit HR executives, the common reasons I hear for low adoption include perceived cost and the idea that they dont feel like they can tell people what to do. These reasons dont hold water.
Cost can be addressed through plan design with stretch matches that encourage higher employee contributions and maintain relatively flat contribution costs to the employer.
The claim about not telling people what to do is very contrary to the paternalistic reputation of non-profits. First of all, its in the best interest of the employees. Second of all, 90% of employees not saving for retirement say they would do so if they were automatically enrolled by their employer, according to the Employee Benefit Research Institutes 2013 Retirement Confidence Survey. Finally, when properly communicated with a chance to opt-out of automatic enrollment, weve found that 89% of employees participate in the plan. Those who truly want or need to opt-out do so.
It seems to come down to educating plan sponsors. Financial professionals should make automatic enrollment a priority so that employees in the tax-exempt sector dont fall too far behind and the organizations can save their paternalistic reputations.
Is this an issue youre seeing in the market? Lets discuss in the comments.
Friedman is the tax-exempt national practice leader with the Principal Financial Group, an investment management and retirement leader. A noted expert on 403(b) plan design, he has been consulting with tax-exempt organizations for more than 20 years and has been in the retirement plan business since 1986. A version of this blog originally ran on
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