The Ideal Plan driven by auto features made popular courtesy of the 2006 Pension Protection AC (PPA) has made dramatic improvements in increasing participation rates and account balances for many workers. But the new realities of job hoppers can severely mute the effects of the auto plan as outlined in a recent article by T Rowe Price. So what can plan sponsors do?
Let’s review the Ideal Plan first:
- Auto-enrollment at 6% (the difference in dropout rates between 3% and 6% is negligible)
- Auto escalation at 1% annually up to 12%
- Stretch match – if a company is matching 50% of the first 6%, then change the formula to 25% of the first 12% (people tend to defer up to the match)
- Use of professional managed portfolios like target date funds or managed accounts
According the Bureau of Labor Statistics, average tenure at jobs is 4.4 years; 91% of Millennials expect to stay at their job less than three years. Those that defer at 6% v. 3% almost triple their chances of reaching retirement income goals. But if a plan’s default rate is 3%, job hoppers keep getting set back every time they make a move. Some leave a trail of low account balances which causes massive leakage.
Strategies to help job hoppers include:
- Higher default deferral rates
- Auto escalation
- Stretch match
- Helping workers to consolidate and better manage their retirement assets through roll-ins
Not mentioned or widely employed is using a workers default rate at their prior job which would require record keeper cooperation. Also, people usually make more money when they change jobs – ask if they would like to defer 25% or more of their raise.
The world is changing. People will only change jobs more often and more people, especially younger workers, will depend on their 401k or 403b for retirement. Why not help?
