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401(k) Auto-Enrolling Jumps in Status

o Karen M. Kroll
23.02.2011 kl 15:15 | CFOworld (US)

A growing number of employers are automatically enrolling employees in their companies' 401(k) plans, a recent survey of 210 mid- to large-size firms by Aon Hewitt shows. In 2010, 57% of 401(k) plan sponsors offered automatic enrollment, nearly three times the 17% that did so in 2006. As the term suggests, employees with a company that offers auto-enrollment are automatically enrolled in the firm's 401(k) plan once they meet any eligibility criteria, unless they specifically opt out.

 

A growing number of employers are automatically enrolling employees in their companies' 401(k) plans, a recent survey of 210 mid- to large-size firms by Aon Hewitt shows. In 2010, 57% of 401(k) plan sponsors offered automatic enrollment, nearly three times the 17% that did so in 2006. As the term suggests, employees with a company that offers auto-enrollment are automatically enrolled in the firm's 401(k) plan once they meet any eligibility criteria, unless they specifically opt out.

What's more, 47% of respondents also include auto-escalation. That is, unless participants opt out, their contributions automatically increase each year to a pre-set maximum.

Auto-enrollment, particularly when combined with auto-escalation, can significantly improve employees' readiness for retirement. Consider the 2010 report, "Raising the Bar: Pumping Up Retirement Savings" by the Defined Contribution Institutional Investment Association. Researchers analyzed the savings of employees with 31 to 40 years of eligibility to participate in their firms' 401(k) plans. They found that their success in saving enough to replace 80 percent of their pre-retirement income jumped from 45.7 to 79.2% in plans with the following features: a high automatic-enrollment rate cap, a higher annual automatic escalation rate, and a reduction in automatic escalation opt-outs. "The way you design these programs is incredibly impactful," says Lew Minsky, executive director with DCIIA.

Another 401(k) Cost to Deal With

Pending legislation, though, could have its own impact on 401(k) programs -- all of them -- and their cost to employers. The Lifetime Income Disclosure Act, or Senate Bill 267, would require benefit statements sent to plan participants to include "the monthly annuity payment that would be made if the employee's total account balance were used to buy a life annuity that commenced payments at the plan's normal retirement age," according to information from the website of Senator Jeff Bingaman, (D-NM), the bill's sponsor.

After Bingaman introduced the legislation in early February, it was referred to the Committee on Health, Education, Labor and Pensions, GovTrack.us reports. Bingaman introduced a previous version of the bill in 2009; it never became law.

Including this information undoubtedly will increase costs for plan sponsors and administrators. At the same time, it should provide plan participants with a better idea of just how much they're likely to have in retirement. The earlier version of the bill garnered support from Prudential Retirement, as well as AARP and other groups, as this article n Plan Advisor notes.

For companies that now use auto-enrollment, though, the 401(k) seems to be a better tool these days.

Mirror Maker Sees a Benefit

Saxonburg, Pa.-based II-VI Inc., a manufacturer of laser lenses, mirrors, infrared optical materials, and other products, implemented auto-enrollment about five years ago. Currently, overall participation is at a robust 89%, says CFO Craig Creaturo. Prior to auto-enrollment, participation was at a still-impressive 80%. Auto-enrollment played a role in the jump. "Our ability to get new participants to make an initial entry into the program has been enhanced greatly by auto enrollment," Creaturo says.

"The bulk of folks are fairly passive," adds Pamela Hess, director of retirement research at Aon Hewitt. Many simply never get around to filling out their plans' enrollment forms.

At the same time, employees' general tendency to passivity -- a liability when they're expected to step forward and sign up for a plan -- can be an asset when they're auto-enrolled. Based on Hewitt's research,just 10% of those automatically enrolled opt out. As a result, 401(k) participation rates jump from an average of about 60% without auto-enrollment to about 90% when it's implemented, Hess says. What's more, that holds true even when participants are automatically enrolled at higher contribution rates -- say, 8%, she adds.

It's not just employees who benefit. Auto-enrollment also helps ensure that a company's 401(k) plan passes the non-discrimination tests required by the IRS. The tests are intended to ensure that both highly-compensated employees and those earning more modest wages are participating in the plan. "Plans that auto-enroll people at robust savings levels will, almost by definition, meet the testing rules," Minsky says.

That's been the case at Lufkin Industries, a designer and manufacturer of oil field equipment based in Lufkin, Texas. Automatic enrollment "has helped participation rates and discrimination testing," says Chris Boone, chief financial officer and treasurer.

Remember the Match

Before moving to an auto-enrollment plan, however, CFOs will want to check the potential impact on the employer match, assuming the company offers one, says David Wray, president of the Profit Sharing and 401(k) Council of America. As participation increases, typically so will the percent of people eligible for employer match. That will increase costs, of course.

At II-VI, the additional costs are worth it, Creaturo says. "401(k) matching is one of our most favorite costs to incur because we want all employees to take advantage of this company-provided benefit," he says. "This means our employees are saving and thinking about the long term, and we like that."

Auto-enrollment also makes it even more important to consider carefully what investment choices are offered. Often, employees remain with the investment options into which they're defaulted. "Employees will think, 'Well, the company knows more than me,'" Wray says.

Finally, companies should consider including current employees in their automatic enrollment programs, Hess says, noting that about 85% of employers automatically enroll just new hires. To be sure, including current employees could mean a spike in the total amount the company must match. However, excluding them from the firm's auto-enrollment efforts means a large group of employees may fall short of their retirement savings goals.

Automatic enrollment and escalation clearly boost employees' likelihood of adequately saving for retirement. They get "more people participating and participating at higher percentages of pay," Wray says.

Keywords: Business Management  
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