The majority of employers want to prepare employees for a financially secure retirement, but have found educational campaigns unlikely to result in substantial changes in behavior. Employers walk a fine line when they implement automatic features; some argue that they enable lax saving habits and investment ignorance by funneling participants into plans automatically.
On the other hand, Steve Utkus, director of Vanguard's Center for Retirement Research, recommended that employers use "participant inertia to their benefit and do it exclusively with plan design."
According to a 2010 survey by Deloitte and the International Foundation of Employee Benefit Plans, approximately three-quarters of plan sponsors either care about or take great interest in their employees' retirement readiness.
For those employers, "you can signal through plan design what is the right thing to do by creating a savings culture through the plan," Utkus said this spring at the Boston Mid-Sized Retirement & Pension Plan Management Conference.
To boost plan contribution rates, employers have several tools available to them. Auto-enrollment is a step in the right direction, says Utkus, but low deferral rates remain a problem, such as stopping at 3% of pay. Thus, it's important to combine this with an auto-escalation, increasing participants' investment rates automatically by 1% or 2% each year until they reach an ideal 12% to 15%, according to Utkus, adding that auto-escalation should have a lower endpoint for low-income workers and a higher threshold for more amply paid employees.
Employers as enablers?
Ron Cohen, managing director and head of retirement services at DWS Investments, Deutsche Bank Group, dismisses the claim that these tactics merely give employees fish without teaching them how to catch their own, so to speak.
"You need to be realistic about what you can accomplish, so I am comfortable [with these tactics]," he explains. "Plan sponsors worry they're becoming too paternalistic, but unfortunately for something as complicated as this, I think we do need to spoon feed participants."
Adds Christopher Jones, chief investment officer of Financial Engines: "Setting up a plan so it works for the average participant and results in good outcomes for them - even if they're not willing to take that level of responsibility - is not only prudent from the perspective of the plan sponsor, but required from societal perspective if we expect 401(k) plans to actually deliver on retirement security. It's not going to if we force everyone to make their own decisions."
Jim Green, executive director of HR for Lacks Enterprises, Inc., explains that his company implemented an auto-enrollment strategy two years ago, which starts at 3% and goes up 1% every year for three years until it reaches 6%. As a result, participation increased from 69% to 90%.
"I'm sure we wouldn't be at 90%, we would be closer to high 60s," if we left the decision to enroll up to participants, he says. He doesn't worry that employers are becoming enablers because the company and provider offer participants comprehensive education as well. In addition, participants are required to meet every other year with a financial advisor.
"It's not like the old days where you have the defined benefit plan. At the end of the day, it's going to be [the participant's] responsibility to save at a level that can provide them with the quality of life they want when they retire. And we just want to make sure that we're getting them the right tools and most education as possible, as early as possible, so they have enough time to prepare for and manage their retirement," he explains.
Don't set it and forget it
When coupled together, auto-enrollment and auto-escalation can drive higher participation rates. They are not a panacea, however, if applied ineffectively, Utkus warned.
For example, if a company has a 2% or 3% entry level at auto-enrollment, but does not increase that contribution level automatically, this does not create enough in retirement savings because participants tend to stay anchored at these defaulted rates, he explained.
Profit sharing is an additional tactic that employers can use, but it is variable and fluctuates. In the best-case scenario during financially successful years, contributions grow, but in poor circumstances, the employee contribution and employer match remains at the base level.
Often, employees won't rebalance their plan elections and risk an insufficiently diversified portfolio. Utkus advised employers to revisit employees who are already enrolled, but who may have underdiversified holdings, with a re-enrollment strategy.
Default participants into a target-date fund or another vehicle that will help balance their portfolio in 60 days and give them the chance to opt-out, he said. This can be independent of the plan event and done on a one-time basis or annually. Often, it is used when a plan sponsor changes recordkeepers or changes the whole menu of investment options.
This approach can radically transform plan behavior. In one case, Utkus noted, only 26% of participants made the active choice to opt out. Originally, only four in 10 participants had well-diversified portfolios, but after the re-enrollment process, eight in 10 had well-rounded plans.
"Employers will object because it's seen as un-American; people should make choices on their own, but I think this view fails to account for the fact that many people feel they lack the skills to make informed choices, [or] don't pay attention and let their choices drift," Utkus says.
Cohen has reservations: "We're taking participants who, in a lot of cases, have made a conscientious decision where they want to invest," and moving them into a default target-date fund. "I do struggle a bit with the re-enrollment of participants who have already made an affirmative election of where they want to put their money."
For sponsors who agree with Cohen, another option is to auto-enroll eligible non-participants.
"You're walking them through a different door into the same room" by using these tactics to increase enrollment, says Gerald J. Wernette, director of retirement plan services at Rehmann, one of the largest financial services, accounting and consulting firms in the Midwest. Or, going a step further, mandatory enrollment is a popular option among private universities.
Whatever enrollment strategy plan sponsors use, Utkus stressed that to change retirement planning behavior in a fundamental way, simply offering retirement education seminars is insufficient, as such meetings rarely reach employees who are not investing or lack comprehensive investment strategies.
"We can't directly ensure retirement readiness, but we can create an environment that nudges or encourages participants to move in that a direction," Utkus told the conference attendees, pointing to auto-enrollment, auto-escalation, profit sharing and re-enrollment as possible solutions.
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