Auto Enrollment in Place? Good, but Without Auto Increase, Disaster Lies in Wait

Even with employer matches, automatically enrolled workers' annual savings doesn't hit the recommended minimum 10 percent of pay.

The University of Washington had a great retirement program, but Kathleen Dwyer knew things could be better.

Participation is set up so workers have the option of joining immediately or are automatically enrolled into a target date fund after two years’ service, says Dwyer, the Seattle university’s executive director of benefits. Participants automatically are enrolled to contribute 5 percent of pay until age 35, when they get moved up to contribute 7.5 percent. At 50, participants can choose to contribute 10 percent. The university matches 100 percent of employee contributions.

It is a great contribution schedule, but the process of getting participants to understand and make the best choices for their needs wasn’t optimal, Dwyer says.

Over the years, the school’s two 403(b) plans—which are similar to 401(k) plans but have different coding because of their educational status—added so many service providers that it gave participants more than 60 investment choices. Plus, participants had to choose one of the plans’ multiple record keepers to get advice and other information.

Participants hesitated in joining immediately because of the myriad choices they had to make, Dwyer says. Two years of delayed participation can make a big difference.

“The average person out there has a lot going on, and to get inspired to make great decisions is hard to do” with so many layers of choices, says Dwyer. “It wasn’t the dynamic we wanted.”

In early April, the university whittled its record-keeping list down to Boston-based Fidelity Investments and TIAA-CREF in Charlotte, North Carolina, for the annuity portion of investments. Starting this fall, the plans’ 17,000 participants will get all enrollment and investment education from Fidelity instead of various record keepers, as previously was the case.

“We think this is going to be much easier for people to understand, much easier to enroll and to get help,” Dwyer says.

The University of Washington is one of many plan sponsors that are focusing on creating better plan designs to improve their workers’ retirement savings results. According to consulting firm Aon Hewitt’s 2012 Hot Topics in Retirement survey, nearly half of plan sponsors are making participant retirement readiness a top priority. More than a third, or 36 percent, say they are likely to review their plan design.

“There has been a real sea change, and it has to do with the fact that these 401(k) plans are no longer supplemental plans,” says Lori Lucas, defined contribution leader at Callan Associates. “It puts an entirely different perspective on savings and [plan sponsors] understand they need to shift their thinking.”

A few years ago, employers made a dramatic move to improve employee retirement accounts by automatically enrolling workers into 401(k) plans. It got people to start saving, but with Fidelity Investments research showing that 60 percent of plans with automatic enrollment start workers’ accounts with 3 percent of pay—it simply wasn’t adequate.

Even with employer matches, automatically enrolled workers’ annual savings don’t hit the recommended minimum 10 percent of pay. Plus, many workers don’t increase the amount they put into their accounts, says Lauren Brouhard, senior vice president of marketing in Fidelity’s Smithfield, Rhode Island, office.

“Auto enrollment has helped get a lot of people in the game, but the reality is, most participants don’t take it upon themselves to save more,” Brouhard says.

To get better results, employers need to automatically enroll workers and increase employee contributions annually, says Jason Chepenik, managing partner at Chepenik Financial in Winter Park, Florida. Employers worried about paying more in matching contributions should consider stretching out the contribution over a longer period of time. The goal should be getting employees to contribute more of their money.

“Don’t ever do automatic enrollment without auto escalation,” Chepenik says. “Employers [with automatic enrollment alone] can brag about a 95 percent participation rate, but you’re setting that 95 percent up for disaster if you don’t automatically increase their contributions.”

While not being ready for retirement causes employee problems such as working longer than expected, the situation can be costly to companies, says Liz Davidson, founder and CEO of Financial Finesse in El Segundo, California.

Financial Finesse’s 2012 Return on Investment Case Study shows that employees who delay retirement and continue to work full time can cost employers between $10,000 and $50,000 per worker annually, Davidson says. The increase comes from higher health care costs and salaries for older, more experienced employees compared to younger workers doing the same jobs, she says.

“As a company, if your employees aren’t retiring at a normal retirement age, the cost is pretty staggering,” Davidson says. “We are seeing [employers] starting to realize this.”

Davidson says more employers are gaining confidence in learning what drives employee savings behavior. Knowing this helps employers empower workers with plan designs that will help them make their own retirement decisions.

“Employers and employees are moving in the right direction,” Davidson says. “A generation ago, people got pensions; now they don’t. This concept that we are in charge of our retirement is taking hold.”

Patty Kujawa is a writer based in Milwaukee. To comment email editors@workforce.com.