Inertia is a powerful force in nature, and in human behavior. Even the most proactive and engaged plan designs (and plan designers) can, over time, slide from being in a groove to being in a rut.
Here are three ways to reinvigorate automatic plan designs.
1. Auto-enroll all Eligible Participants
Over the past decade a growing number of plans have embraced automatic enrollment, in the process not only simplifying and streamlining the process, but also expanding the number of individuals who are saving for retirement. These days, new hires, regardless of their age, are routinely defaulted not only into the plan itself, but also into some type of qualified default investment alternative, whether it be a managed account, target-date fund, or balanced fund.
However, those who have been employed for some time are often not accorded that convenience. Instead, perhaps because they are presumed to have previously made a decision not to participate, it is assumed that if they were to have changed their mind, or have changed circumstances, they would take it upon themselves to enroll on their own. Or perhaps in some cases, the very success of automatic enrollment gives pause because adding all those existing workers to the plan (along with matching employer contributions) brings with it financial consequences.
Regardless, and certainly if the plan has had automatic enrollment in place for new hires for a time, the better way, it seems to me, is to offer the same opportunity to all eligible workers.
2. Auto-escalate Employee Contributions
While there is evidence that this is changing, for nearly as long as there have been automatic enrollment plans (and it goes back to the early 1980s at least), the default contribution rate has been 3%. Now, regardless of how that became the default of record, eventually becoming ensconced in the auto-enroll safe harbor of the Pension Protection Act of 2006, there’s one thing on which nearly everyone will agree: a 3% rate of savings is almost certainly not enough.
Having embraced the automatic enrollment design (and, with luck, extended that to all eligible workers), you can make automatic enrollment better by helping participants save more by automatically increasing their rate of savings by 1% or 2% per year. There is some evidence that, with a three- to four-year lag, plans that have adopted automatic enrollment do move on to add auto-escalation as an option. But think of the missed retirement savings and security in the interim.
3. Reenroll at Least Once – and Maybe More
A common practice in moving from one recordkeeper to another has been to “map” similar fund options from the old platform to comparable (if not identical) funds on the new platform. In recent years, this mapping process has been improved by not just copying over existing fund choices (which may not be optimal, and may not have been reviewed or updated in a long time), but by reenrolling everybody in the plan to an age-appropriate asset allocation fund, such as a target-date fund.
Reenrollment has some logistical and communications issues, of course. It is a bit like moving every year, and if not nearly as complicated (or costly) as actually changing recordkeepers, it can be challenging to explain, particularly to participants who themselves have slipped into a rut. And you might well be advised to leave participants who have voluntarily elected to opt out of the reenrollment once (or twice) where they elected to be.
But if as a plan sponsor/fiduciary you have liability for the fund choices participants have made (and, outside of a 404(c) safe harbor, you do), wouldn’t you want to take advantage of the opportunity to help participants invest their retirement savings in a fund that is overseen by professionals, rebalanced on a regular basis and invested with some sensitivity to their retirement timing?
Or, as the foregoing suggest, at least have a process in place that not only reminds them of the advantages – but nudges them toward a better result.
- Nevin E. Adams, JD