According to a March 2014 Employee Benefit Research Institute survey, almost half of all workers without a retirement plan responded that they were not at all confident they would be financially secure in retirement. In contrast, only one out of 10 with a retirement plan indicated that they were not at all confident they would have enough money to live comfortably during their retirement years.*
While the survey results may not be too surprising, they reveal the importance of encouraging participation in a retirement plan. One solution to encourage participation is automatic enrollment.
Making it Easier to Save for Retirement
In their decisions about 401(k) saving, employees often “follow the path of least resistance.” This is the conclusion of a new National Bureau of Economic Research study entitled, “Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance.” Their research concludes that employees typically do whatever takes the least amount of effort, generally doing nothing which the researchers characterize as “passive decision-making.”
However, through plan features such as automatic enrollment, 401(k) plan administrators can make good use of such passive decision making behavior to influence employee participation in a company-sponsored retirement plan.
Automatic enrollment in a 401(k) plan sets a default or no-action-required option, which takes a percentage of an employee’s salary that will be automatically deducted from their paycheck. Employees have the right to elect to opt-out of salary deferrals and they also can elect to withhold a different percentage. Since automatic enrollment went into effect following the Pension Protection Act of 2006, many companies have seen a boost in the number of employees contributing to their qualified retirement plans as a result.
Increasing the Contribution Rate Threshold
The default contribution rate threshold has hovered around 3%, which many financial advisors consider to be an insufficient amount to save for retirement, stating 10-15% as the optimal goal. When plan sponsors set a low automatic contribution threshold, some participants may never increase their contribution rates. With this in mind, many plan sponsors are now opting to set a higher automatic enrollment contribution rate than 3%. In some cases Alliance Benefit Group has seen default contribution rates set by plan sponsors as high as 7-8%.
Stepping Up Contributions Automatically
Another way to facilitate increased savings by participants is by including an auto-escalation feature in an auto-enrollment program. That way participant contribution rates are increased by a specific amount each year, until they reach a predetermined threshold, such as 10%.To learn more about implementing automatic enrollment in a retirement plan or implementing an automatic escalation feature, contact your local Alliance Benefit Group representative.
*The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans By Ruth Helman, Mathew Greenwald & Associates; and Nevin Adams, J.D.; Craig Copeland, Ph.D.; and Jack VanDerhei, Ph.D., EBR