Sunday, November 25, 2007

Motivationally Speaking


Two years ago, I wrote about the “next level” in defined contribution designs: a growing interest on the part of plan sponsors in focusing on service elements like participation rates, deferral amounts, and appropriate asset allocation—a precursor, if you will, for the designs that would eventually come to a fuller fruition in the Pension Protection Act. Since then, there have been any number of industry surveys that tout the boom in automatic plan designs—as does ours.

And yet, despite the pickup in automatic enrollment programs—23.1% of those 5,500 employers responding to PLANSPONSOR’s 2007 Defined Contribution Survey now have these programs in place compared with 17.1% a year ago—it has yet to manifest itself noticeably in participation rates. The average participation rate reported was 72.7%, and while that is higher than the 70.1% in the 2006 survey, it remains short of the 74.9% reported in 2005—before such programs were the hot trend(1).

One explanation for the modest uptick in participation rates lies in the fact that less than a quarter of responding employers have embraced automatic enrollment, of course—and that number varies depending on the market segment. Only 13.3% in the micro-segment have adopted automatic enrollment, compared with 35.9% among the largest programs and 34% in the mid-size segment. A second and just as plausible explanation lies in the fact that nearly two-thirds (62.1%) of respondents said that they had adopted automatic enrollment for new employees only, rather than extending it to all eligible employees. Indeed, more than three-quarters of large employers did so on a prospective eligibility basis, compared with 45.8% of micro-plans, though that may be a function of when the feature was adopted. Opt-out rates—7.7% on average, and 3.0% at median—are consistent with the findings in the 2006 survey.

However, what I found most striking in the survey results was that more than half of employers that had adopted the design say they did so because their organization “wanted to be more proactive in helping employees save”—dominating all other factors. Just 13% said they “needed more participation” to help pass discrimination tests (then again, only about one in five respondents said they had failed a discrimination test in 2006, and that was down considerably from the 2005 results), and half that number said that traditional enrollment/education efforts were not successful. And while it certainly has provided some inspiration, if not motivation, only about one in 10 said that the Pension Protection Act has made the feature “more attractive.” That finding may, of course, be attributable to several factors: that many of these employers had adopted automatic enrollment prior to the passage of PPA, that some have adopted the feature outside the provisions of the PPA’s auto-enroll safe harbor (the match requirements and retroactive solicitation are problematic for some, particularly for smaller programs), or it may simply be that the safe harbor provisions aren’t effective until next year.

Support for the former two reasons is evidenced by the survey’s finding that only 11.5% have implemented contribution acceleration (though that is twice the 2006 pace)—a feature that automatically increases employee deferrals by a certain percentage each year, and that is incorporated in the requirements for the PPA’s automatic enrollment safe harbor. Significantly, while nearly a quarter of the largest employers have adopted the feature, less than 15% in the mid-market have, as have only about one in 10 in the small market—and half that many in the micro-market. For those that have adopted the feature, a 1% annual increase is the clear “norm.”

Consider also that more than half this year’s respondents said that an automatic enrollment safe harbor would not affect their decision on the provision—and a sizeable number said that such a safe harbor was “not necessary.” Still, across all market segments, plan sponsors said that only two-thirds of active participants are deferring enough to take full advantage of the maximum employer match.

All in all, then, it appears that it is neither the PPA’s “carrots” nor the “stick” of burdensome nondiscrimination tests that will lead plan sponsors to adopt automatic plan designs—just the simple realization that some employees need help to become participants, and that, even then, participants frequently need help to do the right things.

- Nevin E. Adams, JD


(1)The survey database can include different—and certainly includes more—plan sponsors each year. Consequently, year-over-year comparisons, while instructive, may yield varying results.

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