401k Plan Design and Auto Features
401k plan design auto features are making savers out of the American worker. But what can 401k plan design auto features do for the eligible employee worker who shows no interest in saving more for tomorrow? Plenty. Increased numbers of employers are adding to their 401k plan design an auto re-enrollment option within the company plan. Employers that offer retirement plans with automatic enrollment are implementing 401k plan auto re-enrollment; in an effort to capture employees who have previously opted out of the plan. Employers also want to provide a second chance to those who joined the company before auto-enrollment was in place.
As its name implies, 401k plan auto re-enrollment is a process by which employers “re-enroll” employees in the retirement plan, usually by moving their retirement savings into a default investment option, like a target date fund; however, some employees are not comfortable with it. Some of the employee push-backs occur when an employee has already made their asset allocation among the plan investment lineup.
At issue is the fact that employees may have previously opted out of the plan the first time they were auto-enrolled. Many employers auto-enroll their employees just once — when they first join the company. However, now some employers are choosing to use 401k plan auto re-enroll, and they re-enroll their employees over and over in the hopes that eventually, the participant will remain in the plan rather than opt-out.
For some employers, there is a fear that employees will get annoyed at having to opt-out repeatedly. Those fears are largely unfounded. A recent DCIIA survey found that opt-out rates for 401k plan auto-enrollment, and auto-escalation, are negligible. That is to say, even if employees do have concerns or feel annoyed about auto-enrollment — or re-enrollment — they typically do not take the action required to opt out.
A 2017 Pew Research study reported that respondents cited an unwillingness to sacrifice their current quality of life as a primary reason for not saving for retirement. However, most workers are unphased by a 3-5% reduction in their pay, especially when they see their retirement savings growing. The theory is, this outweighs any discomfort or annoyance employees may have, and eventually, they’ll stop opting out if employers keep re-enrolling them.
Can this 401k plan auto re-enrollment method be seen as forcing employees to participate in a retirement plan? We have all heard, persistence outweighs resistance. But 401k plan auto re-enrollment is proving to be effective, at least for some employers. Currently, 13% of employers that offer an auto-enrollment program through Fidelity also offer a “re-solicitation” feature to bring non-participating employees back into the retirement plan. Seven percent of those employers conduct that type of 401k plan auto re-enrollment on an annual basis.
However, not all employers are on board with the idea. Less than 2% of companies with retirement plans administered by Vanguard re-enroll opted-out participants. Instead, Vanguard uses communication to entice employees to participate in its clients’ retirement plans. Specifically, they have successfully boosted retirement plan participation with personalized email campaigns Other firms have incorporated, targeted lessons on Health and wealth, capital preservation, retirement education and general 401k plan education with financial wellness.
401k plan design auto features, including auto-enrollment, has moved the needle on retirement plan participation in a big way in the last decade-plus. More than 90% of employees participate in plans with an automatic enrollment feature, compared to 60% in voluntary enrollment plans. Will 401k plan auto re-enrollment for the purpose of convincing opted-out participants to remain in the plan be as effective? It’s an interesting question, and to be sure, only time will let us know for sure. Nonetheless, it’s a novel idea, and another way for industry, service providers and employers to push the envelope to improve participation rates and retirement readiness.
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