It’s one thing for defined contribution plan sponsors to hear research and expert opinions about the benefits of auto-enrollment and how a vast majority of employees welcome it, but it’s much more impactful to actually hear about it from another 401k plan sponsor who has tried it. At a TPSU (The Plan Sponsor University) program held at the University of Southern New Hampshire, Adjunct Lecturer David Clayman from Twelve Points Wealth Management discusses the successes experienced by a local 100 employee company.
The CFO of the mechanical alignment company with offices throughout the country decided to institute auto-enrollment six years ago and saw participation spike almost immediately with a healthy 80% rate currently. Rather than employees getting angry or opting out because they cannot afford to participate, there was very little if any pushback. In fact, most of the younger workers did not even notice.
Along with helping people to better prepare for retirement keeping the company more competitive, auto-enrollment has meant that highly compensated employees are allowed to contribute the maximum to their 401k plan.
Clayman asked the CFO about auto-escalation which seemed like a good idea but not something he had heard about. Some say that auto-enrollment without auto-escalation is like peanut butter without jelly all part of the Ideal Plan taught at TPSU. Employers often auto-default workers at low rate which can give employees a false sense of security that they are on track for a successful retirement. Starting at 5% or more and then escalating 1% annually to 12% is recommended so employees feel it less offset for most by salary increases.
Also recommended is stretching the match, if the company can afford one. Participants tend to contribute to the match so rather than 50% of 6%, which is typical, experts are recommending 25% of 12%. It sends the right signal.
The next frontier is tackling portability issues in a mobile work force so new employees are contributing at the level of their last job as well as consolidating disparate defined contribution accounts and IRAs.
