We all know about the good things that automatic enrollment does for workers – but what’s in it for plan sponsors?
For participants, the benefits are relatively obvious: By helping enroll employees into the DC plan, they start saving earlier, by enrolling them in a diversified managed asset allocation account/strategy they get the benefits of diversification, and by increasing those initial default rates over time (contribution acceleration), they will have even more savings accumulated. All of those add up to increased retirement readiness, according to a recent report by the Defined Contribution Institutional Investment Association (DCIIA).
However, the report acknowledges that defining and measuring the benefits to the employer has been less clear-cut.
To provide context for employers (and those that are working to help employers make that decision), the DCIIA report outlines a four-point framework that it says could help employers take a more “holistic” approach when making decisions about the implementation of automatic features.
DCIIA says that employers should consider these four elements:
1. Workforce Planning
With regard to the first point, the DCIIA report notes that an October 2010 survey conducted by AARP found that one-third of older adults decided to delay retirement due to the economic effects of the recession, and that while multiple factors contribute to that decision, helping employees achieve their retirement goals in a timely fashion can facilitate what has been referred to as “workforce management.” Delayed retirements may also reduce the employer’s ability to hire new employees, reducing the flow of new ideas and talent into the organization. Phrased another way, the planned/anticipated retirement of employees can allow an employer to create advancement and career diversification opportunities for others, which can help a company retain and attract a talented workforce.
2. Employee Satisfaction and Engagement
The report cites research that shows that employers who promote an outcome-oriented view of their DC plan, instead of positioning the plan as a savings vehicle, can help employees begin to perceive the plan as the primary means by which the employer is facilitating the employee’s income in retirement. In essence, doing so implies a long-term relationship between the employer and employee, potentially leading to better outcomes for both parties, according to the report.
3. Financial Performance
The report cites three specific contributors to financial performance with automatic enrollment programs:
- The DC plan is likely to attain greater assets, resulting in stronger negotiating power for plan-related fees.
- Increased DC plan participation and/or contribution rates among non-highly compensated employees, potentially reduces the need for a non-discrimination testing safe harbor.
- Higher plan participation and/or contribution rates among non-highly compensated employees reduce the probability of the employer having to make unexpected qualified non-elective contributions (QNECs).
4. Associated Expense
The report acknowledges that automatic enrollment does have its costs, including potentially higher matching contributions (though the report offers the stretch match alternative as a counterbalance). There may also be additional payroll or recordkeeping costs associated with implementing automatic features, though some of these costs may be allocated to the plan itself, rather than to the employer.
