401(k) Savings Zoom When Employers Set Autopilot

Americans love their automatic products: ATMs, DVRs, coffee makers, garage-door openers, you name it. Now add to that growing roster the employer-sponsored automatic enrollment retirement plan, typically a 401(k), in which employees are now stashing money in record numbers.

An analysis by Aon Hewitt, the Lincolnshire, Illinois-based consulting firm, of 3 million employees across 120 large companies indicates that close to 76 percent of eligible employees participated in company contribution plans last year, driven by the auto-enrollment feature. That represents a nearly 10 percent jump from the number enrolled in 2005.

“Employees know they need to save for retirement but are too nervous to make the decision themselves, particularly given today’s volatility in the stock market,” says Gerald Wernette, director of Rehmann Retirement Builders at Rehmann Financial in Lansing, Michigan. “They see automatic enrollment as a way to have their investment decisions made for them, trusting their employers to mitigate any risk.”

For employees, the benefit is clear: They save for retirement while otherwise they might not.

“There’s no doubt that automatic enrollment prepares a lot more people for the retirement years,” says Steven Dimitriou, managing partner with Mayflower Advisors in Boston. “Even though automatic enrollment can put employees on automatic pilot when it comes to their retirement savings, they’re better off than without such a plan.”

Auto-enrollment plans have, indeed, broadened the number of people saving for retirement. However, there is concern that they dampen the overall savings rate of participants, who often contribute as little as 2 percent of their salary on a monthly basis without ever increasing their contribution rate.

In other words, employees tend to take a laissez faire approach toward such plans, letting them have a life of their own after the initial sign-up. Those who voluntarily enroll in a 401(k), on the other hand, tend to contribute at a significantly higher rate—an average of 7.8 percent monthly—according to Aon Hewitt’s research.

In addition, more than two-thirds of companies with auto-enrollment programs set default contribution rates at 3 percent of salary or less, an inadequate level of savings for employees who expect to retire one day. The Vanguard Group recommends those with incomes below $50,000 save 9 percent of salary or more, including a company match; those with incomes between $50,001 and $100,000 save 12 percent or more; and those with incomes above $100,000 save at least 15 percent.

“If a company is going to implement an automatic enrollment plan, it should start off employees at a meaningful number,” says Pamela Hess, director of retirement research at Aon Hewitt. “Saving just 1 percent less over a career can have a dramatic impact on savings, ultimately leading to nearly a 15 percent loss in retirement income.”

To drive savings rates higher, many companies have begun adding automatic annual increases to auto-enrollment plans. “An employer will start employees at, say, a 3 percent monthly savings rate but tell them, ‘Every year that monthly contribution will go up 1 percent until you tell us to stop,’ ” Dimitriou says.

Companies can boost participation rates by periodically “back-sweeping” employees, that is, automatically enrolling workers not participating in a 401(k) rather than enrolling only at the point of hire, Hess says.

Companies clearly have begun to see the value in auto-enrollment. According to the Aon Hewitt study, 60 percent of employers analyzed had an auto-enrollment feature in 2010, up from just 24 percent in 2006, when Congress passed the Pension Protection Act. That act removed roadblocks that discouraged employers from offering auto-enrollment and provided such programs protection from liability if they met certain requirements.
Putting such a plan in place, however, only makes sense if a company is willing to fully back it. That means more than sending out periodic emails reminding employees that the auto-enrollment program exists.

“A company has to give the automatic enrollment plan due consideration,” Rehmann Financial’s Wernette says. “It has to put in the time and effort that will give real results.”

That effort should translate into regular updates as to the company’s commitment and ongoing education for employees as to the plan’s benefit, according to Wernette. “You don’t want your employees to feel they’ve been sold a bill of goods.”

Companies also must understand upfront that automatic enrollment will likely drive up in-house costs in terms of matching contributions, as well as administrative expenses.

“It translates into money, time and resources,” Dimitriou says. “On the upside, such plans mean that more assets are in play.”

In addition, auto-enrollment can be a great marketing tool; it sends a message that the company is socially responsible and cares about its employees’ future.

Auto-enrollment, however, isn’t a good idea for all employers. Companies with a high turnover workforce, such as retail stores and restaurant chains, might not want to incur the additional costs and administrative burdens.

In addition, the benefits might be limited for their employees, who would accumulate small balances and be more likely to abandon them or take a lump-sum distribution when they leave the company. Such plans are also ineffective for those nearing retirement, who would benefit more from short-term, higher-yield investments.

Still, research points to the fact that overall, employees overwhelmingly appreciate auto-enrollment plans, and they provide a competitive edge in recruiting and retaining top talent. “Bottom line, employers have a great opportunity to help employees save for retirement,” Wernett says, “and at the same time benefit themselves.”

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