A Prospective Perspective

Plan sponsors (and advisers) who think the Pension Protection Act’s automatic enrollment safe harbor represents an easy solution to disappointing participation rates may have another “think” coming, according to the findings of recent industry data—Including PLANSPONSOR’s own 2006 Defined Contribution Survey.

The 10th annual version of PLANSPONSOR’s assessment of the activities of nearly 5,000 plan sponsors found that the median participation rate for plans that had implemented automatic enrollment was 80%. Now, that’s certainly nothing to sneeze at, but it’s not very much ahead of the 75% median rate for the plans in the same survey that had not taken the step toward automatic enrollment—and it’s well short of the outcome that one normally sees touted alongside that option (generally in the 90-95% participation range).

Our survey was based on the experience of plans that had adopted automatic enrollment prior to last summer’s passage of the Pension Protection Act of 2006 (PPA), along with its new automatic enrollment safe harbor (which kicks in next year). Still, since most of those programs have been in place now for more than two years, one might well expect a “better” result.

Traditionally, caution has ruled the day in adopting automatic enrollment. That caution has generally meant that relatively modest deferral rates were chosen, that contributions were invested in relatively conservative options, and that the program was implemented on a prospective basis—only for workers hired after the implementation date. Indeed, for many plan sponsors, the still-active assumption is that workers who had previously “chosen” not to participate (generally by not returning the enrollment form) have effectively already made their decision—to let “sleeping dogs lie.” Nor is this common presumption likely to change of its own volition even with the passage of the PPA, whose automatic enrollment safe harbor does not require a retroactive application.

In fact, IMHO, it seems quite likely that this decision to implement these programs on a “prospective only” basis likely accounts for the negligible uptick in participation rates in automatic plans reporting in PLANSPONSOR’s DC Survey.

What it does mean is that plan sponsors looking for a silver-bullet solution to their participation problem (not to mention the advisers touting such programs as same) may wonder why their prospective solution isn’t turning out to be quite the panacea for those ills they had been led to expect.

While plan sponsors are understandably reluctant to rouse those “sleeping dogs,” it’s hard to imagine that they aren’t just as concerned about their retirement well-being as those that have just been brought on board. The ultimate solution, of course, lies in understanding that the reasons some newly eligible workers chose not to participate—or more likely made no choice at all —are the same reasons the not-so-newly eligible are still on the sidelines.

That, and being willing to do something about it.

- Nevin Adams