'Back-Sweeping' to Boost 401(k) Participation

Aon Hewitt study finds a growing number of companies auto-enrolling, or "back-sweeping," all existing employees who aren't already participating in 401(k) plans. This practice can certainly have advantages -- if properly communicated to affected workers, experts say.

By Mark McGraw

If you're looking to paint a somber portrait of American workers' financial outlook for retirement, there are plenty of statistics to help fill in the picture.

In March of this year, for instance, the Washington-based Employee Benefit Research Institute's Retirement Confidence Survey found just 22 percent of more than 1,000 U.S.-based workers saying they are "very confident" they'll have enough money socked away for a comfortable retirement when the time comes.

The silver lining, however, may be that this number -- which EBRI says dipped to record lows between the years 2009 and 2013 -- has actually been trending slightly upward in the last two years.

A growing number of workers also expressed confidence in their ability to ready themselves financially for retirement. The number of employees expressing confidence they're doing a good job in this respect -- which also bottomed out in 2013, according to EBRI -- spiked to 25 percent in 2015.  

So, it seems more employees could be acknowledging the scary -- and very real -- possibility of reaching retirement age without sufficient savings, and are trying to do something about it.

And, some newer research suggests employers are taking the issue just as seriously, and are taking action to help workers build bigger nest eggs for the golden years.

Consider the recent Aon Hewitt survey analyzing changes companies are making to 401(k) plans in an effort to help workers close the retirement savings gap. The poll of more than 360 employers, representing more than 10 million employees, finds 401(k) plans shifting in a few key areas.

For example, the survey found 42 percent of companies matching employees' 401(k) contributions dollar-for-dollar, compared to 31 percent of organizations that reported doing the same in a similar Aon Hewitt poll in 2013.

Employers are also defaulting employee contributions at a higher rate, according to Aon Hewitt. Among the employers that automatically enroll their workers, 52 percent said they automatically enroll them at a savings rate of 4 percent or more. Thirty-nine percent of employers reported the same two years ago. In addition, 51 percent indicated they default workers at or above the company match threshold, an increase of nearly 10 percentage points since 2013.

At this stage, automatically enrolling employees in 401(k) plans and matching their contributions are fairly common components of many companies' retirement plan strategies. But another tactic identified in the Aon Hewitt survey could signal employers' adoption of a more aggressive approach to boosting workers' retirement savings.

In 2013, Aon Hewitt found 8 percent of companies automatically enrolling not just new hires, but all eligible employees -- also known as "back-sweeping" -- on an annual or one-time basis. This year, 16 percent of organizations indicated engaging in this practice, according to Aon Hewitt.

While that number remains small, we may soon see it climb higher, says Rob Austin, the Charlotte, N.C.-based director of retirement research at Aon Hewitt.

"A lot of employers have had automatic enrollment in place for a few years now," he says. "Let's say a company started automatic enrollment in 2010. The company knows that all those people hired in the last five years are participating. But what about those [workers] with more than five years tenure?"

Such employees, says Austin, "have a good chance of staying a long time if they've made it through those first five years. So don't you want them taking part [in 401(k) plans]?"

Geno Cufone at Ascensus Inc. agrees that more companies may well give back-sweeping a try.

"We expect this trend to continue, especially in the larger plan market," says Cufone, the senior vice president of retirement administration at the Dresher, Pa.-based retirement-plan and savings-services provider.

For employees, "the main benefit … is that they begin to save sooner," says Cufone. "Automatic enrollment uses the inertia that had traditionally worked against workers to work for them. In other words, if you help them do the right thing, they rarely take steps to undo it."

However, the additional cost associated with back-sweeping -- albeit small -- could deter some employers, he adds.

"Beyond that, there may be a little effort to administer and monitor the automatic feature. But that, too, is nominal."

While the cost of back-sweeping is indeed a concern, it's not necessarily a prohibitive factor -- provided the circumstances are right, says Austin.  

"Let's say you have high participation in your plan -- which automatic enrollment plans typically do. Let's say the percentage [of participating workers] is around 90 percent. The cost to back-sweep 10 percent of your employees shouldn't be too significant."

For employers considering "back-sweeping" as an option, it's important to first understand how it works, says Laurie Rowley, co-founder and president of the National Association of Retirement Plan Participants.

Back-sweeping, she says, "is the process of taking existing non-participants and automatically enrolling them into the plan, defaulting them into a qualified default investment alternative, [which] is often a target-date fund."

While employees are welcome to opt out of the process, "many choose to stay in the plan," she says, adding that "re-enrollment goes a step further by taking all participants' account balances and automatically defaulting them into the QDIA."

For many employees, making decisions about asset allocation and investment diversification can be "simply overwhelming," says Rowley. "Being placed into a target-date fund can help alleviate these issues and takes out the guesswork."

Employers may experience resistance, of course, from employees with reservations about being automatically defaulted. These fears are "largely unfounded," however, and HR leaders can help workers overcome them with effective communication, says Rowley.

"How you communicate with the people working for you makes a huge difference in how these types of plan changes are received," she says. "Keep it simple, don't use industry jargon and make sure you're putting the employee at the center of the communications experiences, so that it's relevant."

Affected employees should be notified well in advance of the date they'll be "back-swept," and the message is worth repeating, adds Austin.

Unlike new hires, these employees have grown accustomed to their paychecks being a certain size, and may bristle at seeing it shrink unexpectedly, he says.

"Their pay is going to go down, and they're going to see that. That sometimes creates a few more people [who] would opt out than new hires who were automatically enrolled. So you want to send the message a few times, so these employees know they're going to see their paychecks decline a bit. You really don't want to catch them off-guard."

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Dec 14, 2015
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