Even with a heavy focus on education and new plan designs that try to round up new employees and get them saving in a 401(k) plan, there are still flaws in the workplace-sponsored retirement plan market.
The biggest has nothing to do with what employers are offering and everything to do with the innate human characteristic of inertia. Studies have shown that plans are doing a great job in getting new employees enrolled in their 401(k), 403(b) or 457 plan but have completely ignored employees who have participated in the plan for years but have never made a change to their investment allocations or increased their contributions.
Re-enrollment is one way employers are attempting to kick these longer term employees into making changes to their retirement plan contributions. Employers will send out a notification asking them to make new investment selections by a certain date otherwise their assets will be defaulted into a target-date fund based on their age.
“What happens then is that 80 to 85% end up defaulting into the TDF,” says Cathy Peterson, global head of insights programs at JP Morgan.
Plan participants are quickly put on a better path toward retirement because their asset allocation better matches their retirement trajectory, she adds. Plan sponsors also benefit because the Qualified Default Investment Alternative rule gives them stronger protections from investing liability.
Two routes to re-enrollment
Employers tackle re-enrollment two ways. They either encourage participants to make a decision by a certain date or they will be defaulted into the plan or they re-enroll everyone at the company into a TDF and give them the opportunity to opt out.
“There are different ways to do the same thing. It is all around messaging and looking at plan demographics,” says Peterson.
Re-enrollment helps existing participants diversify their holdings without having to put too much thought into it.
Also see: “Auto enrollment, escalation feed 401(k) success.”
Some employers are hesitant to take this step because they think most of their employees will opt out. But Rebecca Katz, principal and head of Vanguard’s participant strategy and development unit, says this is a baseless fear. Even when participants are defaulted into the QDIA at a higher contribution rate, say 6% or more, they still opt out at the same rate as those defaulted in at 3-4%.
“When plan sponsors first used auto-enrollment, they tended to do it with new employees. Now we are seeing them do it with their most loyal and long-term employees, on an annual basis, and we see very few people opting out,” Katz says.
If employers can get employees to opt in at a higher rate, a lot more participants will be saving an adequate amount for retirement, she says. This can be “an expensive proposition for employers,” she says because if companies default people in at a higher rate they may have to spend more money on the company match.
Also see: “403(b) plan sponsors committed to employer match.”
“I think the industry has done a great job helping transition Americans into the world of defined contribution and self-empowered and figure-it-out-yourself investing, but we know that there are still millions of Americans still struggling with this challenge,” says Jerry Patterson, senior vice president of retirement and income solutions at The Principal. “If you look at the participation rates and enrollment rates for the first 20 years of DC, we did a yeoman’s job of embracing 401(k) plans. For the last 10 years it has been hard to get people to participate and save more.”
He says The Principal is an enormous advocate of automatic enrollment and of annual sweeps.
“We will do our best to put the employees we serve in the place where most of them should be in a perfect world and give them all the options in the world to change that decision if it doesn’t fit them,” Patterson says.
The biggest obstacles to people saving enough for retirement are not enough money and simple inertia.
Also see: “Do 401(k) plans need fixing?”
“If we can put them in a better place and leave it to them to modify it to fit their needs … we’re going to transform the landscape,” he says.
The industry has done a great job with plan design and better communications so when people get auto-enrolled or auto-swept into their workplace retirement plan it’s not a shock or a surprise, he believes.
“I’m hoping we will get to a point in the not-so-distant future where this is the rule and not the exception,” Patterson says.
Paula Aven Gladych is a freelance writer based in Denver.
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