DC (defined contribution) plans like 401(k)s are getting the fact that implementing auto-enrollment, made safe through the 2006 Pension Protection Act, is an easy way to boost participation rates. But many are missing the boat by not also using auto-escalation according to a recent article by SHRM. So why are DC plan sponsors reluctant?
62% of larger plans use auto-enrollment as of 2015 according to DCIIA (Defined Contribution Institutional Investor Association) but just 48% use auto-escalation. Though auto-enrollment has raised participation rates, it has also deflated deferral rates because the default is set too low and the use of auto escalation is limited. Another problem is that participants typically defer up to the company match which is commonly 50% of 6%. Some experts suggest “stretching” the match to 25% of 12%.
So why are companies wary of instituting auto-escalation?
- They don’t want to be too paternalistic
- They’re concerned about complaints
- The cost may be too high if there is a match
Alicia Munnell, Director of Boston College’s Center for Retirement Research at a recent Senate Finance Committee hearing went so far as to suggest:
Given the enormity of the retirement savings crisis … we need bolder steps…The most important policy change would be requiring all 401(k)s to be fully automatic, while continuing to allow workers to opt out if they choose. Plans should automatically enroll all of their workers—not just new hires—and the default employee contribution rate should be set at a meaningful level and then increased until the combined employee contribution and employer match reach 12 percent of wages.
At TPSU programs around the country, plan sponsors are shown the effect of the auto or “ideal” plan for a typical worker starting young which can triple savings without increasing fiduciary liability and actually limiting work.
As one TPSU adjunct lecturer is fond of saying, auto-enrollment without auto-escalation is like peanut butter without jelly. Research is starting to show that participants, especially Millennials, expect their employee to take control of their DC plan – certainly the opt out rate up to 12% deferral is very low. Perhaps more important is networking with colleagues who are using auto-escalation to get their feedback which is part of a typical TPSU program. Enroll now at a program near you and get HRCI, SHRM, CPE and CEBs CE credits.
