Auto-plan design features have made a significant impact on retirement readiness and are being widely adopted. So what are the best practices? A white paper by BMO reviews the questions and the decisions that need to be made, and offers some suggestions as well. The questions that need to be answered include:
• Who should be enrolled? New and current employees? What about those who have previously opted out? Should the opt-out form include an option of “not this year” versus “never”?
• Deferral rate. The most common is 3% but that may thwart the goal of retirement readiness, especially without auto-escalation. Some suggest 6% or the match max.
• Auto escalation. The most common choice is 1% to 2% per year, but that raises the question of when the escalation occurs. Some suggest that escalation should be concurrent with salary increases.
• Escalation cap. The most common cap is 10%, but should that be adjusted for the demographics of the plan or even be customized for the participant — for example, based on age?
• QDIAs. TDFs are most common, but many investors prefer safety. The plan should have proper selection and monitoring processes in place for TDFs, which are much different than reviewing individual funds.
Not mentioned: the stretch match. Rather than 50% of the first 6%, which is typical, why not 30% of the first 10%, or 3% of pay at the auto-escalation cap? Many plan sponsors also claim that auto plan features save them as much as 50% of their time dealing with the plan. It’s also easier for employees.
