Why Doesn’t Every Plan Have Automatic Enrollment?
For all the good press and positive results that automatic enrollment gets, one might well expect that every plan would embrace it. And yet today, nearly a decade after the passage of the Pension Protection Act, many still don’t.
So, why don’t all plans use automatic enrollment — and what can you do about it? Here are the primary objections that I have heard from plan sponsors — and some possible responses.
Cost.
The simple reality is that automatic enrollment “works,” which is to say that overnight, it has the very real potential of transforming a long-standing plan participation rate of 67% or 75% to 95% or greater.
The other simple reality is that when you take that likely increase in participation rate (generally from 70% to 95% or so), and then figure out the increase in matching dollars that would result — well, it can be a sudden budget jolt, particularly when you think about it applying to an employee population that is likely more tenured and highly compensated.
Personally, I’ve never seen much response to the threat that plan sponsors who aren’t attentive to the outcomes of the plans they provide will find themselves accounting for that decision in a court of law (remember when they were all going to get sued for not offering advice?). Nor have I seen the cost possibilities of adopting a stretch match offset the PR realities of imposing it.
For years, employers have struggled with the rising (and often annually rising) costs of benefits like health care. A number of larger employers have embraced the so-called “de-risking” of their pension obligations, in many cases trading the uncertain future obligations on their bottom line of their defined benefit pension in favor of a defined contribution alternative. But that has also had the effect of transferring a greater uncertainty about retirement to their workers.
RESPONSE: Today there is plenty of evidence to suggest that workers are increasingly concerned about retirement finances, and that those concerns are not only cutting into their productivity at work, but that, in a growing number of situations, their solution to those concerns (real or imagined) is simply to extend their working careers. And a growing number of CFOs recognize that those costs are real and growing — and can be mitigated by better retirement preparations by their workforce.
Some (still) view it as too paternalistic.
Like it or not, at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach.
Indeed, inklings of this can be seen in the varied industry surveys that continue to find that, even when plans adopt automatic enrollment, they tend — by a margin of 2:1 — to apply it only to new hires, rather than to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to. Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above.
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 recent hires. Moreover, while the PPA doesn’t mandate going back to older workers, plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have.
RESPONSE: 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. For employers — particularly those who have already embraced the design on behalf of their new hires — the question remains: Shouldn’t you be just as invested in the retirement security of those who have made a longer-term commitment to you?
Safe harbor plans already have it covered.
Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination and top-heavy tests have since found the solace required in adopting a safe harbor design.
RESPONSE: Maybe nothing. If a safe harbor plan is already in place, well arguably, that’s just a different kind of automatic enrollment, though it doesn’t tend to show up in the adoption statistics.
Some fear it will reduce deferrals.
More accurately, it may reduce average deferrals. Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (at least until design features like automatic contribution acceleration kick in). Put another way, participation rates go up, and average deferral rates dip — at least initially. That might mean that some individuals do, in fact, save less by default than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default. This is a line of thinking that gets picked up every so often by the financial press, generally by some writer looking to find a contrarian angle on automatic enrollment. And sure enough, the conclusion seems so striking that many seem to feel compelled to share those articles, rather than simply dismissing it as ill informed, if not uninformed.
RESPONSE. Remind them that those articles ignore the reality — borne out by the data — that many workers, and generally younger, less tenured workers, will be saving more because that initial savings choice was automatic. Those most likely to be short-changed by automatic enrollment are higher income individuals — who arguably ought to know better.
Concerns about administrative issues.
Even in this age of automation, it can be complicated to unwind payroll elections, and while the PPA outlined a series of provisions to make it easier to give workers the ability to opt out (an extended grandfathering period for them, and the ability for their employer to temporarily invest those monies in vehicles that wouldn’t lose value during that temporary period), it can still be a tedious, painful process (depending on whom you rely on for payroll and recordkeeping services).
RESPONSE. Sure it can be a hassle if it should come up — and we’re talking about somebody’s paycheck. On the other hand, so few opt out, the hassle might be more illusion than reality.
Some employers — especially smaller ones — know why employees aren’t contributing.
When you look at the survey data on automatic enrollment adoption, there is a wide gap between the largest employers (where automatic enrollment is relatively common) and the smallest employers. Of course, most industry surveys do a better job of capturing the activity among the former (those being the clients of the providers who produce those surveys) than the latter, so it’s easy to think that automatic enrollment is more prevalent than it actually is.
However, when you talk with smaller employers about the concept, it’s not unusual to encounter a very personalized resistance, because they: (a) have likely approached their workers individually on the topic; and/or (b) have heard directly the reason(s) why they are not participating. To them automatic enrollment is a particularly harsh approach, since it basically requires that they ignore or discount the reason(s) they have already been given.
RESPONSE: First, it’s worth confirming that they have, in fact, actually made those inquiries directly. Second, see how long it has been since that conversation. Circumstances change, after all — and that trusted worker who told them several years back why they couldn’t contribute, may now be embarrassed to change course. Finally, of course, automatic enrollment, particularly with the help of today’s default investments, makes it a lot easier to start saving — right.
What's Next?
The reality is that automatic enrollment won’t be appealing to every plan sponsor’s benefits philosophy or budget. But unless your plan participation rate is in the upper 90% range, the reality is that whatever you are doing to encourage participation isn’t as effective as automatic enrollment could be. And once you get people in the plan, just think what else you could be helping them with…
- Nevin E. Adams, JD
So, why don’t all plans use automatic enrollment — and what can you do about it? Here are the primary objections that I have heard from plan sponsors — and some possible responses.
Cost.
The simple reality is that automatic enrollment “works,” which is to say that overnight, it has the very real potential of transforming a long-standing plan participation rate of 67% or 75% to 95% or greater.
The other simple reality is that when you take that likely increase in participation rate (generally from 70% to 95% or so), and then figure out the increase in matching dollars that would result — well, it can be a sudden budget jolt, particularly when you think about it applying to an employee population that is likely more tenured and highly compensated.
Personally, I’ve never seen much response to the threat that plan sponsors who aren’t attentive to the outcomes of the plans they provide will find themselves accounting for that decision in a court of law (remember when they were all going to get sued for not offering advice?). Nor have I seen the cost possibilities of adopting a stretch match offset the PR realities of imposing it.
For years, employers have struggled with the rising (and often annually rising) costs of benefits like health care. A number of larger employers have embraced the so-called “de-risking” of their pension obligations, in many cases trading the uncertain future obligations on their bottom line of their defined benefit pension in favor of a defined contribution alternative. But that has also had the effect of transferring a greater uncertainty about retirement to their workers.
RESPONSE: Today there is plenty of evidence to suggest that workers are increasingly concerned about retirement finances, and that those concerns are not only cutting into their productivity at work, but that, in a growing number of situations, their solution to those concerns (real or imagined) is simply to extend their working careers. And a growing number of CFOs recognize that those costs are real and growing — and can be mitigated by better retirement preparations by their workforce.
Some (still) view it as too paternalistic.
Like it or not, at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach.
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 recent hires. Moreover, while the PPA doesn’t mandate going back to older workers, plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have.
RESPONSE: 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. For employers — particularly those who have already embraced the design on behalf of their new hires — the question remains: Shouldn’t you be just as invested in the retirement security of those who have made a longer-term commitment to you?
Safe harbor plans already have it covered.
Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination and top-heavy tests have since found the solace required in adopting a safe harbor design.
RESPONSE: Maybe nothing. If a safe harbor plan is already in place, well arguably, that’s just a different kind of automatic enrollment, though it doesn’t tend to show up in the adoption statistics.
Some fear it will reduce deferrals.
More accurately, it may reduce average deferrals. Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (at least until design features like automatic contribution acceleration kick in). Put another way, participation rates go up, and average deferral rates dip — at least initially. That might mean that some individuals do, in fact, save less by default than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default. This is a line of thinking that gets picked up every so often by the financial press, generally by some writer looking to find a contrarian angle on automatic enrollment. And sure enough, the conclusion seems so striking that many seem to feel compelled to share those articles, rather than simply dismissing it as ill informed, if not uninformed.
RESPONSE. Remind them that those articles ignore the reality — borne out by the data — that many workers, and generally younger, less tenured workers, will be saving more because that initial savings choice was automatic. Those most likely to be short-changed by automatic enrollment are higher income individuals — who arguably ought to know better.
Concerns about administrative issues.
Even in this age of automation, it can be complicated to unwind payroll elections, and while the PPA outlined a series of provisions to make it easier to give workers the ability to opt out (an extended grandfathering period for them, and the ability for their employer to temporarily invest those monies in vehicles that wouldn’t lose value during that temporary period), it can still be a tedious, painful process (depending on whom you rely on for payroll and recordkeeping services).
RESPONSE. Sure it can be a hassle if it should come up — and we’re talking about somebody’s paycheck. On the other hand, so few opt out, the hassle might be more illusion than reality.
Some employers — especially smaller ones — know why employees aren’t contributing.
When you look at the survey data on automatic enrollment adoption, there is a wide gap between the largest employers (where automatic enrollment is relatively common) and the smallest employers. Of course, most industry surveys do a better job of capturing the activity among the former (those being the clients of the providers who produce those surveys) than the latter, so it’s easy to think that automatic enrollment is more prevalent than it actually is.
However, when you talk with smaller employers about the concept, it’s not unusual to encounter a very personalized resistance, because they: (a) have likely approached their workers individually on the topic; and/or (b) have heard directly the reason(s) why they are not participating. To them automatic enrollment is a particularly harsh approach, since it basically requires that they ignore or discount the reason(s) they have already been given.
RESPONSE: First, it’s worth confirming that they have, in fact, actually made those inquiries directly. Second, see how long it has been since that conversation. Circumstances change, after all — and that trusted worker who told them several years back why they couldn’t contribute, may now be embarrassed to change course. Finally, of course, automatic enrollment, particularly with the help of today’s default investments, makes it a lot easier to start saving — right.
What's Next?
The reality is that automatic enrollment won’t be appealing to every plan sponsor’s benefits philosophy or budget. But unless your plan participation rate is in the upper 90% range, the reality is that whatever you are doing to encourage participation isn’t as effective as automatic enrollment could be. And once you get people in the plan, just think what else you could be helping them with…
- Nevin E. Adams, JD
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