7 misconceptions employers have about retirement auto features
May 19, 2014 9:34 AM
1. Our employees will resent the perceived loss of control over more of their paycheck.
The concern about upsetting employees is the most common objection to adding auto features to a retirement plan, says Stephen Moser, a consultant with RetireAdvisers Services. But, he says, according to a Harris Poll conducted in 2007, 98% of those currently automatically enrolled agreed with the statement, You are glad your company offers automatic enrollment.
2. If too many new participants join the plan, the match will become too expensive.
Adding auto features to an employers plan may not be as expensive as they think, Moser says. Most of an employers higher paid employees are already in the plan and contributing aggressively, so its mostly the lower-paid employees who will be auto-enrolled. As a result, the match will be based on percentages of those lower salaries only, he suggests.
3. If we make everything automatic, employees wont take responsibility for their own retirement planning.
Most workers want to start saving for retirement, but sometimes need a little help to overcome their own behavioral inertia, Moser says. By adding auto features, employers are not taking responsibility away from their employees, theyre helping them to start moving in the direction they already want to go, he says.
4. The extra work and expense to our company doesnt help our bottom line.
Auto features can actually help make a company more profitable, especially when factoring in turnover, Moser says. Turnover is very expensive, particularly when it involves key executives. One of the benefits executives appreciate most is the ability to contribute as much as possible to a tax-advantaged retirement plan, he says. Unfortunately, they are often frustrated by having contributions returned to them at the end of the year because not enough non-highly-compensated workers are participating. Auto enrollment can increase the participation rate.
5. It will be a nightmare trying to administer all these new small accounts when employees leave the company.
The Department of Labor recognizes that keeping track of all previous employees and administering the accounts created for them through auto-enrollment would be very labor intensive. Thats why the regulations released in 2004 allow automatic distributions and rollovers, Moser says. If an account balance is under $1,000, the account can be automatically cashed out and the funds sent to the participant. If the balance is between $1,000 and $5,000, the money can be automatically rolled over to a default IRA custodian.
6. Establishing a default investment for new auto-enrolled accounts increases our fiduciary liability.
Increased risk of fiduciary liability was a legitimate concern in the past, but not since the enacting of the Pension Protection Act of 2006 (PPA), Moser says. The PPA stipulates that as long as the default investment passes certain qualifying conditions, the liability for the choice of that investment remains with the participant, not the employer, he adds.
7. Automatically enrolling employees wont really have much impact on their retirement readiness.
Its true that saving 1% toward retirement wont have much of an impact on a persons future retirement income, so why not start at a higher rate instead and add automatic annual increases, Moser asks. A recent study by The Principal shows that only 4% more employees opt out of auto-enrollment if the starting deferral rate is 6% instead of 3%, he adds.
