Revisiting Auto Enrollment

The cost of adding more employees to defined-contribution plans has slowed the use of automatic-enrollment features, according to a recent study. HR leaders should focus more on accommodating employee behavioral and post-retirement risks into their organizational retirement-savings plans.

By David Shadovitz

Most employers have yet to include automatic enrollment in their 401(k) plans, despite the obvious benefits it offers employees who are struggling to save for their retirement, according to a recent study by AARP. But experts predict that could soon change, as the economy begins to pick up steam.

In a survey of 896 employers with 500 or more employees that have 401(k) plans in place, the Washington-based nonprofit organization for people age 50 and older found that six in 10 employers have yet to add an auto-enrollment feature to their programs, even though nearly all of the employers (94 percent) said they were either "somewhat" or "very" familiar with the option.

Of those companies not offering the mechanism, roughly 30 percent cited concerns that employees would not like it. Meanwhile, 20 percent cited cost as the major reason for not automatically enrolling new hires and employees.

Experts, however, believe cost is actually the chief culprit.

The expense of adding such a tool is clearly the big concern here, says Amol Mhatre, senior vice president of Aon Consulting's retirement practice in Los Angeles.

"If you have 50 percent of employees participating in a plan and that number goes up to 80 percent, it's going to have a cost impact on your business and your willingness to add automatic enrollment," he says.

Bill McClain, a principal in Mercer's retirement consulting practice in Seattle, agrees.

"Having worked with a lot of employers, cost has had a huge impact on their decision not to add automatic enrollment," he says.

McClain, however, predicts that more employers might begin adopting the feature.

"Currently, most companies are in the mode today that they can't increase their costs, but as the economy begins to pick up, I would expect some of those restraints will go away," he says.

Experts acknowledge that auto enrollment isn't for everyone, noting that some employers may already have a high level of plan participation. Nonetheless, they say, there continue to be companies out there whose workforces would undoubtedly benefit from it.

The AARP study found that 16 percent of the employers without auto enrollment were either "very likely" (4 percent) or "somewhat likely" (12 percent) to add it to their retirement plans in the next 12 months.

Experts say they are skeptical of the study's finding that the main reason employers do not adopt the feature is because of concerns over employee acceptance.

If such a concern exists, they say, it would be groundless.

"Our experience is that, when you do automatic enrollment, there's a 90-percent adoption rate irrespective of the compensation levels of new hires," says Robyn Credico, a senior retirement consultant at Towers Watson in New York.

Credico also points out that the amount employers decide to automatically contribute has little or no effect on whether or not a person opts out of the program.

"Perhaps some HR people may fear employees will opt out if the rate is too high, but that's simply not supported by the data," she says.

Michael Herdon, manager of financial security at AARP, says he's surprised so few of the employers in the study make the feature available to current employees, considering it's something he and others believe employees would welcome.

Of those companies that offer auto enrollment, a majority (58 percent) reported they limited the feature to new hires when they implemented their plans. Slightly more than one-third (35 percent) automatically enrolled all non-participating employees who were eligible for the plan.

The AARP study's findings suggest that employers have noble intentions when it comes to adding the feature, with 74 percent of the respondents indicating they've added it to encourage employees to save more retirement. (The second most cited factor was passing nondiscrimination tests, at 49 percent.)

Aon's Mhatre believes many HR leaders should look at tools such as auto enrollment through the lens of "retirement readiness."

By looking at their retirement plans differently, he says, HR leaders have the ability to address the retirement readiness of their workforce in a significant way without increasing their costs.

He also points out that retirement readiness is linked to a variety of risks. "The biggest risk, of course, is the marketplace," he says. "But the other risk that needs to be viewed with equal weight is behavioral risk.

"If I start at the age of 25 and save, I might have a significant amount of money," Mhatre says. "But if I don't start saving until I'm 35 and make bad investment decisions, that's another story."

Unfortunately, he adds, "I don't think HR leaders have spent enough time thinking about behavioral and post-retirement risks" and factoring them into company decision-making.


Jun 14, 2010
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