401(k) Plan Sponsors May Want to Think (or Rethink) “Automation”
Posted by Stacy Sandler and Scott Cole on August 27, 2013
Nearly 400 plan sponsors from a broad range of plan sizes participated in Deloitte’s 2012 Annual 401(k) Benchmarking Survey. The good news revealed in the survey: 401(k) account balances are on the uptick since their lows in 2008 and 2009, with 44% of plan sponsors indicating average balances over $75,000 — an all-time high. The downside is that this is still far short of what most employees will need for a comfortable retirement. This may be why 84% of plan sponsors surveyed cite “improving participant education” and 78% list “retirement readiness” among their top priorities. However, based on other findings revealed in the survey, along with some of our recent discussions with plan sponsors, there may be other, more effective opportunities for plan sponsors to increase the number of participants and improve the overall quality of participation.
Implement automatic enrollment. First, automatic enrollment is a valuable feature that is underused, with just over half of plans (56%) requiring participants to opt-out of enrollment upon hire. Those plan sponsors that have implemented automatic enrollment report a positive impact on participation rates (86%) and participant awareness (63%). Furthermore, 58% of respondents indicated that the average contribution rate of participants has increased since implementing auto-enrollment, even though many expected rates to decrease given typically low default contribution levels.
Increase default levels. Along with offering automatic enrollment, plan sponsors might also consider increasing the default level of participation, as some sponsors already have. The most common default deferral percentage under automatic enrollment (reported by 48% of respondents) remained consistent from 2011 to 2012 at just 3%—enough to get participants into the plan, but not likely to support a comfortable retirement. But 25% of plan sponsors have upped the ante, reporting default rates of 5% or more—this has risen from 20% in 2011 and 15% in 2010.
Re-enroll. Along with adopting higher default rates, leading employers are also implementing re-enrollment programs designed to enroll existing employees who were not previously included in automatic enrollment, or were included at a lower default rate. While participants have the opportunity to opt out of the higher deferral rate, 74% of respondents report low opt-out or cancellation rates (0–5%) for automatic enrollments, so we expect that re-enrollment programs will lead to a higher quality of participation.
Add auto step-up. Finally, we see a real opportunity for employers to improve the quality of employees’ plan participation by pairing an automatic step-up feature with auto-enrollment. Currently only 18% of plan sponsors have a step-up plan tied to automatic enrollment. While about one-third of respondents (31%) have a stand-alone step-up feature, another one-third (34%) don’t offer this feature at all. Because employee utilization of the step-up feature is very low, with 62% of respondents reporting less than 10% of their employees using it, automatic step-up appears to be a more effective way to increase the level of employee contributions and, as a result, increase retirement savings.
We give plan sponsors credit—many have worked hard to increase employee engagement and participation by offering a variety of plan features and educational tools. But the relatively low levels of saving compared to retirement needs, along with persistent low levels of engagement (36% of plan sponsors report only minimal participant activity related to their accounts), indicate that more could still be done. Reducing the need for employee action by automating participation, increasing default deferral percentages, re-enrolling to capture a broader employee set, and automating step-up contributions seem to hold significant promise for boosting both quantity and quality of participation.
Stacy Sandler is a principal in Deloitte Consulting LLP’s Financial Services Industry and focuses in Retirement Services as the National Practice Leader. She has more than 25 years of experience in the retirement plan industry and defined contribution business as a service provider and consultant.
Scott Cole is a senior manager with Deloitte Consulting LLP. Scott has 14 years of experience in HR service delivery, outsourcing advisory, and employee benefits consulting. He also recently spent two years leading Deloitte’s Total Rewards consulting practice in India.