Sunday, November 20, 2005

Participant Directives - I

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Call me old-fashioned, but at a time when it seems like everyone is advocating “automatic” solutions to get participants to do the right thing(s) about saving for retirement, I can’t help but wonder at the irony of participation solutions that don’t require a “participant” to participate.

For the next several weeks, IMHO will focus on some non-automatic alternatives. As always, I would appreciate your reactions, comments, and suggestions:

(1) Make employees fill out and return their enrollment forms.

There was a time when participants’ contributing to a retirement plan was a means of enhancing a retirement that was primarily funded by a traditional pension plan and Social Security – a time when the so-called three-legged stool of retirement security actually had three legs. Now, of course, things are different, and while savings remains – and should remain - a voluntary action, there is no reason that we have to let employees simply ignore the option.

And yet, in many – if not most – companies these days, we let new employees do just that. Typically, on that first day the employee is given a stack of information and forms to complete – W4s, health-care forms, emergency numbers, etc. Most of that information must be provided immediately, while others must follow shortly thereafter. However, generally speaking, the 401(k) enrollment form isn’t treated with the same level of urgency. In face, particularly since they frequently aren’t eligible to participate right away, we simply tell them to take the information home, and when they have to turn it in. Sometimes they are scheduled for an enrollment meeting. But if they don’t turn in the form, that’s the end of it. And in a time when the industry keeps pushing plan sponsors to embrace automatic enrollment – where they must take on the responsibility for picking a deferral amount AND accept fiduciary accountability for deciding where to invest those deferrals – I am amazed at how many firms have never just made people turn back in the signed form.

Earlier in my career, I worked for an employer that was very supportive of the efforts of a certain large charitable organization. I was never sure whether the tactics employed to engage workers in supporting that program financially were the brainchild of that organization or my employer – but I can promise you, they were effective. Rumors abounded that failing to contribute the proper amount could slow one’s career advancement – and there were many stories of people “called in” to explain their lack of support. But, IMHO, one of the most effective tactics employed was the year we were required to turn in those pledge cards to our supervisor. Now, as a supervisor, I cared not a bit about someone’s charitable inclinations – but it became part of my job to make sure that all the cards were turned in by the deadline, and that the contributions were recorded. And, as silly a use of my time as it seemed, I did it (after all, I had heard the same stories).

I’ve little doubt that the requirement to turn those pledge cards over to a supervisor, coupled with the aforementioned paranoia about career advancement, had an impact on the success of those campaigns – certainly in contrast with prior campaigns where we could just stick the cards in an anonymous letter to personnel. But beyond that, I am sure there are some who, under the prior system, intended to fill out the card – but just never got around to it. However, the new system meant that they could look forward to “gentle” reminders from their boss (who, I should add, was getting “gentle” reminders from his boss) until they acted on those intentions.

There’s actually been a study on the impact of making participants turn in their enrollment forms. Called “active enrollment,” researchers noted that three months after hire, 401(k) plan participation was 28% higher among those required to turn in the forms, compared to those at firms with more traditional enrollment practices. And while automatic enrollment has registered higher results, active enrollment achieves them without imposing additional fiduciary responsibility on the plan sponsor – other than to simply do for the 401(k) form what they already do for other forms. Beyond that, since many automatic enrollment programs use a fairly low default rate (generally 2% or 3%), and one that is lower than most participants choose when they actually take the time to fill out an enrollment form, automatic enrollment can actually result in a savings rate lower than might otherwise be the case (at least one study has shown that, over time, average deferral rates actually declined as more and more participants simply let the automatic enrollment process take over and, as a result, more “participants” deferred at those lower rates).

While automatic enrollment does work to get workers participating who might otherwise not, the decision brings with it some fairly significant fiduciary concerns for plan sponsors that adopt it. It “works” by not involving the participant – and one could argue that that isn’t working at all. Certainly not when a process as simple as making sure that enrollment form is turned in helps keep the participant involved – without forcing additional fiduciary responsibility on the plan sponsor.

- Nevin Adams

MORE on active enrollment at http://www.plansponsor.com/pi_type10?RECORD_ID=26835 and http://post.economics.harvard.edu/faculty/laibson/papers/plandesign.pdf

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