Automated 401(K) Tools Are on the Rise -- But Can Advisors Do More to Encourage Participation?
Retirement strategies abound, and advisors recognize that automated enrollment, deferral and escalation options are becoming increasingly more commonplace.
Thanks to The Pension Protection Act of 2006 -- which kick-started the auto-enrollment movement by providing employers with flexible guidelines and relief from non-discrimination rules -- the move toward automated features has been on a steady incline.
According to a recent study by Alight Solutions, 68 percent of companies surveyed are automatically enrolling workers in 401(k) plans, a 10-point jump from 2015.
The research also found that:
- Thirty percent of companies are automatically defaulting workers into plans at a savings rate of 6 percent of pay or higher (compared with the 3 percent default contribution rate that 37 percent of respondents favor).
- A whopping 74 percent of companies with automatic enrollment offer automatic contribution escalation -- a major increase from just a decade ago (28 percent).
Automation is very effective in encouraging employees to start saving, says Comprehensive Benefit Services’ Lee Bethel.
“If you leave people to their own devices, procrastination sets in,” says Bethel. “Features such as auto-enrollment and auto-escalation help them jump start the path to savings.”
Bethel has heard many companies say that they “can’t make someone save,” which is why advisors should push to integrate automated tools that encourage 401(k) participation while finding ways to put plan sponsors at ease.
“If an advisor can get a plan sponsor to bite off on auto-enrollment to start, it’s much easier to add the other features,” says Bethel. Programs that allow participants to opt out have less pushback from a plan sponsor, but that’s when Bethel says advisors can use participant inertia in their favor, since many employees won’t follow through on decreasing contributions.
Also, while he is a fan of auto-enrolling both new and current employees, he says some plan sponsors prefer to start it with only new hires -- it feels less invasive.
As importantly, advisors need to counsel plan sponsors that a 3 percent deferral rate is not enough, says Bethel.
“Even if participants start out at that amount, they need to be encouraged to escalate it to the 7 to 10 percent range as soon as possible,” he says.
Making auto-enrollment easier
John K. Palladino doesn’t hold back on what he thinks helps -- and hurts -- 401(k) participation. As head of the San Francisco Bay Area’s 401(k) & 403(b) Fiduciary Advisors, he says that plan sponsors are often overwhelmed by the process of auto-enrolling employees, including everything from tracking eligibility to sending out required notifications.
“Plan sponsors need to work with a record-keeper that can help manage administrative tasks, which reduces the barrier to offering auto-enrollment,” Palladino says.
He also encourages advisors to involve the record-keepers’ education and enrollment specialists, who can walk participants through the 401(k) retirement planning tools available on their website.
“People are put to sleep by PowerPoint tutorials,” Palladino says. “Instead, they need to actually be walked through a demonstration of the plan participant’s website’s features and, for example, see how they can view their estimated retirement income, per their savings and investing plan. There are also retirement planning tools where you can take salary growth and investment/risk-based assumptions into consideration and include other factors, such as future Social Security income.”
Addressing the real issue
Palladino also says that while automated features aren’t the long-term “Hail Mary” to addressing the country’s retirement savings deficit, it’s a step in the right direction.
“No, flat-out no: Automation won’t solve retirement readiness,” he says. “Plan participants should at least follow the Department of Labor’s guidance that participants should be saving between 10 and 15 percent of their income for retirement – a number most Americans don’t think they can afford.”
Conversely, while Palladino will be the first one to say he’s not a fan of mandates, he wishes the government could enforce auto-enrollment with no opt-out for all employees.
“If you want to really fix the problem, everyone is auto-enrolled at 5 or 6 percent and then auto-escalated a percent each year to at least 10 percent, or up to the IRS 402(g) limit that year,” he says. “The limit on elective deferrals under Section 402(g) is $18,500 in 2018. That would solve a lot of retirement readiness issues.”
Palladino is not alone in his views.
Noted experts from the Center for Retirement Research at Boston College go so far as to state that “401(k) plans could work much better and balances would be higher if all plans were fully automatic – auto-enrollment for both existing and new employees and auto-escalation in the default contribution rate – and contribution rates were set at realistic levels.”
To really break through and encourage auto-feature adoptions with both plan sponsors and employees, Palladino says advisors must face a more important societal issue head on.
“Bottom line: Americans have a prioritization and budgeting problem,” he says. “They have no problem lining up every day to get a fancy coffee or the latest iPhone, but they balk at putting money away for their retirement. We want things now rather than later. Planning and saving for retirement does not give you immediate self-gratification.”
He shares a tactic he uses in enrollment meetings: He asks the most senior executive in the room if the company offers free coffee to its employees. The answer, invariably, is “yes.”
“Then, I put the participants on the spot who are getting regular fancy coffees and ask them to forgo the daily expenditure, drink the free coffee at work, and put that money toward their retirement plan.”
“Don’t make the coffee shop rich -- make yourself rich.”