Automatic Enrollment Becoming the Norm
"It’s really evolving into an automatic 401(k) world," says Liz Miller, senior consultant in the retirement practice of Towers Perrin in New York.
In 2007, more than half of large plans reported using 401(k) automatic enrollment, while the percentage of small plans using the feature increased from 6.8 percent in 2006 to 11.1 percent in 2007, according to the 51st Annual Survey of Profit Sharing and 401(k) Plans, released in September by the Profit Sharing/401(k) Council of America in Chicago.
Pamela Hess, director at retirement research consulting firm Hewitt Associates, says retirement is "top of mind" for employers, and they want to ensure employees are on track to retire, especially since defined-benefit plans are decreasing and more responsibility is falling on employees to save.
"It’s very hard to engage employees," Hess says. "People mean to save and they don’t. Nothing moves participation rates like auto enrollment does."
Experts say automatic enrollment on average increases participation rates in 401(k) plans from about 75 to 90 percent, depending on the industry.
They attribute the across-the-board increased participation to automatic enrollment’s "stickiness," meaning employees often choose not to opt out of the plans and, instead, continue to contribute.
Kinder Morgan, a pipeline transporter and terminal operator in Houston, implemented automatic enrollment in June 2003 because participation in its 401(k) plan was at about 60 percent, which the company considered low, says Sandy Ward, manager of qualified plans. Five years later, in June 2008, she says employee participation surged to 91.5 percent. She says few employees opt out of the program, and many view it as beneficial.
"401(k)s have become a better part of an employee’s savings," Ward says. "We feel employees need to become more proactive in saving for their future."
Companies typically start automatic enrollment contribution rates at about 3 percent of an employee’s pay, experts say. They say the contributions are most often directed to target retirement-date funds, but are sometimes directed toward target-risk, stable-value or managed accounts.
Not only are more employers adopting automatic enrollment for their employees, they are also implementing automatic escalation, where companies increase employees’ contributions by a certain percentage each year to combat stagnant growth and complacent employees from contributing the minimum amount. According to the Profit Sharing/401(k) Council of America survey, automatic enrollment with automatic contribution escalation increased from 8.5 percent in 2004 to 32.8 percent in 2007.
"Auto enrollment is great, but it doesn’t necessarily address the stasis issue—employees just kind of go along with it," says Mary Ann Langevin, defined-contribution business leader with Mercer in Norwood, Massachusetts.
Companies typically increase employees’ contributions by 1 percent a year, says Robyn Credico, national director and defined-contribution consultant for Watson Wyatt Worldwide in Arlington, Virginia. Most companies, however, only automatically escalate contributions up to the amount of the company match or to an average ceiling of 5 percent, and very few going above 6 percent, Miller says. The ceiling for contributions is 10 percent.
Ward says Kinder Morgan implemented automatic escalation in October 2006. Anyone contributing less than 5 percent experienced an auto increase of 1 percent. In 2008, the company revised the plan’s goal to a 6 percent contribution rate for employees, therefore automatically increasing employees’ contributions by 1 percent annually until they reach 6 percent.
With so many more employees participating, and contributing more, automatic enrollment and escalation can be expensive for some companies, particularly those that match contributions up to a certain level. They have to begin matching contributions for employees that likely wouldn’t have been contributing before.
"The cost of automatic enrollment is very high," Hess says.
Kinder Morgan, which does not offer a match program, did not incur any extra costs associated with implementing automatic enrollment, making it a positive feature for all parties, Ward says. She says despite not offering auto enrollment with a match, employees still see the feature favorably.
"We’re pleased to see auto enrollment does work. Inertia does keep them in," she says. "Participants seem to be not threatened by these auto enrollment features. Employees enjoy that we are conscientious enough to help them save."
Employers incurring additional costs associated with implementing automatic enrollment, however, appear committed to helping their employees save in part out of concern for their employees and in part for business reasons, experts says.
"You don’t want people to stay because they have to," Hess says. "This is the cost of doing business. We have to help people save for retirement."