Do auto features drive better retirement outcomes?
When it comes to automatic features in retirement plans, automatic enrollment gets the most press, but plan sponsors are exploring many other automatic options to help employees do a better job of saving for retirement, including auto escalation, auto rebalancing, model portfolios and qualified default investment alternatives.
Weve seen a fair amount of plans adopting auto enrollment, especially when they are coming on board, a startup plan or converting from a prior recordkeeper. That seems to be a good turning point to affect change, said Geno Cufone, senior vice president of retirement administration at Ascensus in Dresher, Penn.
About 16% of Ascensus plans have automatic features, which may seem small but the majority of the companys plans are under $5 million and serve 25 to 75 individuals.
The plans that offer auto enrollment have greater participation rates and employees are starting to [save] at a much earlier age than weve seen in the past, Cufone said. The millennials are getting the benefit because more plans are adopting these automatic features early on in their lifespan.
Also see: Plan sponsors consider 401(k) reviews
Pirie McIndoe, vice president and defined contribution director at Sibson Consulting, said that automatic enrollment has become a really key part to getting people to start saving.
What we all know is the greatest force in business in the universe is inertia. Once something is in motion, it tends to stay in motion. Once you get someone to start contributing, generally they will continue to contribute, he said.
If businesses can get employees to begin contributing at an early age, they will see a benefit, said McIndoe. He pointed out that those early contributions, along with employer matches and compounded interest, make up the bulk of the assets available to participants upon retirement. More than half of the wealth that comes in comes in during the last 10 years before retirement, he said, primarily on the underlying accumulation an employee created by the time they turned 55.
Many companies that use auto enrollment are only using it for new hires. Many retirement experts recommend that companies apply auto enrollment to current employees who previously opted out of the plan as well. They have the opportunity to opt out once they have been opted in, but that classic inertia can work in their own favor as well. Only about 2% of employees who previously opted out elect out of that auto enrollment, Cufone said.
The majority of plans that are using automatic enrollment are defaulting employees in at a 3% deferral rate, but in the past year, Cufone said he has seen more plans adopt a higher initial default deferral rate.
If you are auto enrolling at 3% and the majority of those employees are not highly compensated employees, it could drive your average deferral percentage down, which could cause you to fail nondiscrimination testing. If you set it at 6% or a higher deferral percentage, you have a greater opportunity to influence passing nondiscrimination, he added.
The added benefit is that employees who are deferring at a higher rate are much better prepared for retirement.
About half of plans that adopt auto enrollment also adopt auto escalation, which automatically increases an employees retirement plan deferral rate by 1% annually until it reaches a target number like 12%, Cufone said.
We recommend if you are going to adopt a lower initial deferral rate because you dont want to be too aggressive about how much is automatically taken out of a paycheck, having auto increase is ideal, he said.
Carolyn Wood, director of retirement for Bimbo Bakeries USA in Philadelphia, Penn., said earlier this year that Bimbo was working with Fidelity to implement an easy enroll program that uses anchoring to get employees to not only opt in to their retirement plan but to do so at a higher allocation rate than the typical 3%. Easy enroll gives employees three allocation choices: 6%, 8% or 10%.
When given a choice, plan participants will most likely choose the lowest opt-in amount.
Having an automatic rebalancing feature is helpful in ensuring plan participants keep the investment allocations theyve chosen as the market moves up and down. The feature allows plan participants to set an auto rebalance once a quarter, annually or semi-annually.
We have the ability to set it at the plan level or set it so each participant can set auto rebalance as part of their portfolio, Cufone said.
Model portfolios and QDIAs
Many plans are moving to some sort of model portfolio that employees can be defaulted into.
That is a trend we are starting to see more and more of and also having a qualified default investment alternative that is set with a specific allocation to go hand-in-hand with automatic enrollment, Cufone said.
Model portfolios are created by investment professionals out of the investment options that already are available in a companys retirement plan. Each model appeals to different types of investors, like those with a conservative mindset who want less risk, those who take a more moderate approach to investing and those who are more aggressive and want to pursue real growth in their portfolios.
Also see: 3 considerations in choosing a QDIA
It makes it easy for investors who arent as savvy to end up with a diversified portfolio at the risk tolerance that fits best with their personal retirement goals. Most plans that offer model portfolios expect that employees will place 100 percent of their asset allocations into this portfolio.
Many plans have started offering target-date funds as their qualified default investment alternative to help employees who dont know anything about investing save for retirement. The goal of these is to move investments into less risky options as a person nears their target retirement date.
Paula Aven Gladych is a freelance writer based in Denver.