Automatic enrollment has been an integral part of retirement plan designs for some time now—and yet while common, it’s hardly ubiquitous—and with legitimate reasons. This week we asked readers how—and perhaps if—it was “active” in their recommendations—and you know what?
Now, it’s more than “mere” automatic enrollment—which, according to the Plan Sponsor Council of America’s 64th Annual Survey of Profit Sharing and 401(k) Plans, roughly two-thirds of plans currently have automatic enrollment in place, though it’s considerably less common among smaller plans. Beyond that, more than three-quarters of the plans that have automatic enrollment in place automatically increase default deferral rates over time—and, for the first time ever, the most common default deferral rate is now—well, considerably higher than 3%.
Automatic Recommendations
So—what’s going on with NAPA-Net reader recommendations? Well, just over half (51%) say they recommend automatic enrollment “every chance I get,” though nearly as many (42%) say “it depends.” The rest were in the “not really” (4%), no (2%), or “not so much these days” (1%) categories.
We also got a number of comments:
In Plans where there is not a highly responsible HR person handling enrollment, it can be a compliance trap for the unwary Plan Sponsor. But where you have an engaged Plan Sponsor with a responsible party watching the shop, it’s a beautiful thing!
It is absolutely a best practice in my opinion.
It is unfortunate, but sometimes people need a little nudge to do what they need to do to prepare for retirement. The proof that it works is that most participants will not do something to not enroll, but they won't do something to enroll.
Depends on the client's needs
It depends, but most of the time, it makes sense.
If a plan is Safe Harbor: No If a plan is passing testing: No If the Plan Sponsor is actively engaging ppts at open enrollment and orientation: No If the Plan Sponsor has extremely high turnover: No If the Plan Sponsor is going through a difficult business cycle: No
I think in most cases it makes a lot of sense. Certain organizations that may have high turnover could cause some administrative issues. In those instances where there might be high turnover and also safe harbor contributions, it can also cause a misdirection of employer funds that could be better used to reward longer tenured employees.
Discussed in the context of employer goals for the plan, testing issues or lack thereof, employee demographics and overall engagement with other benefits programs
In a demographic where there is extremely high turnover, non-English speakers, or a smaller business that is trying to get off the ground... Auto Enrollment doesn't always work and creates more work. In this environment with rising costs and a lack of employees, businesses do not want to alienate their participants by doing something that may not be perceived as a benefit.
If a plan has high turnover or is not automated, then the discussion happens as this is out there but here are the potential pitfalls. Most of my clients however do have auto enroll
ACA comes up with every committee meeting, or RFP as a way to enhance plan design and create better participant outcomes. More prevalent in non-Safe Harbor plans, as a way to combat failed ADP/ACP issues.
In the small plan market, employers are weary of creating a "surprise" scenario for participants. No matter how clear the disclosures are, someone who never signed up for the plan will be shocked when their paycheck is lesser than they are used to.
Adding auto-enrollment or the pros/cons is a part of our normal design discussion. It's always discussed as part of education.
We've reviewed it with all of our clients and know which ones will never use it and/or it isn't a fit. So it might still come up from time to time but not much.
I think the old way thinking it was intrusive to the employees is gone and it should be in every plan to ensure eligible participants make an affirmative decision either way.
It doesn't always fit, but we try to discuss it more often than not
If it makes sense for a plan, we repeatedly bring it up.
For the right situation, absolutely. For a small professional firm that only hires one or two people a year, no.
All my existing plans that are going to elect auto enrollment already have. For any new clients who have not elected auto enrollment, we push for it.
We are doing so more than in the past.
As much as I would love auto features for all our clients, they are not for everyone. Plan advisors have to take into consideration a plan sponsor's turnover/rehire situation, eligibility tracking process, payroll file feed to RK and frequency, company budget (if there is a match involved), and communication logistics.
If the workforce is very transient, and possibly with some safe harbor match plans, we discuss; but for most plans I recommend it be added. If they say "not now", then the following year I recommend again and repeat every year. I've had plans finally add it after several years after the initial discussion
Along with target date funds, autoenrollment is one of the true game-changers in our industry in the last 30 years or so.
It depends on the participation rate and type of business. Automatic features don’t raise participation rates above 70% or so.
It doesn't always fit depending on the workforce and/or the client's objectives but where it fits I recommend.
Obviously, AE is not right for every situation; however, for the Plan Sponsors who are really trying to help the Participants, then it is the right thing to do.
Works with almost all employee demographics!
I almost always recommend it but there are cases where I don’t.
It is recommended to a majority of clients, but not all due to client factors.
I have a few clients where I know automatic enrollment wouldn't work for them, but with everyone else I recommend it.
Starting ‘Points’
So—when automatic enrollment is recommended—what was the recommended starting deferral rate? Well, it echoed the findings of the PSCA survey:
63%—6%
16%—5%
15%—3%
4%—4%
2%—8%
And some more reader comments on setting/recommending that rate:
It pairs up well with the matching formula for the Plan, which often caps out at 6%.
I need to not be afraid to recommend more...
It depends on the demographics of the employer. I have some plans with default auto enrollment rates starting at 6% and even one at 8%, but most are still at 3% or 4% for lower paid workers.
Minimum of 6%+ with auto-increase at 1% a year capped at 15%
If there is a matching contribution, I recommend the initial deferral start at the full amount to be matched if the employer can accommodate that in their budget.
My attempts are to get the auto-enroll set so that the participant may receive the full match. 6% is a cast in stone starting point, but seems to be the median of what our plans have. The highest auto-enroll client begins at 10% and our lowest auto-enroll client is at 3%. All auto-enrolls include auto-escalate.
I recommend setting default to amount where participant receives the full match.
If I could get them to 8%, that is my ultimate goal.
I think 6% is a good target, though in many cases it makes sense to align the automatic enrollment with the company match.
I like to set up participants on a path to success. I am all for Congress to mandate auto-enrollment and auto escalation for every participant. I recommend that plan sponsors do auto-enrollment, but they do not often want to go that high. I will be happy when the regulations mandate auto enrollment and escalation.
6% continues to be on the edge of acceptance or opt out.
Smaller plan sponsors struggle with the Administration of the auto enrollment.
More interest than ever to default at a higher rate than the standard 3%. A handful of clients have revised the default rate to 5% & 6%.
I start with 6% but sometimes employers opt to back that down.
Sometimes lower to equal the match. But I think 5 or 6 is a good starting point.
5% is the average. Often times I recommend a rate slightly lower than an applicable match so that participants will need to take action (and be engaged) to get the full benefit available.
Generally, 5% or 6%, depending on the group and their demographics and goals
Or to coincide with their match formula
Or at least to the level of their match.
Generally aligned with match cap or 6%.
The first recommendation is always to auto-enroll folks at the employer match deferral rate which is typically in the 4%-6% range, but I always try to encourage 6%.
5% was a close to best answer. Generally, I recommend that automatic enrollment be, at a minimum, enough to get the full match. If there is no match, or the match is not on at least 5% of pay, then I'll recommend 5-6% to start
6 is the new 3, so to speak.
You didn't have an "it depends" button.... we recommend that the default rate be aligned with the match cap.
Most clients want to start small like 2 or 3% but we try and encourage them to push closer to 6%.
I have been successful in raising the "bar" from 3% but haven't been overly successful in getting a starting rate much above 6%.
We try to stretch the match to the beginning deferral rate. Opt-out rates are low—less than 5% of those auto enrolled.
It really depends on the plan sponsor, but 5% seems to be a good middle ground.
Contribution Acceleration
As for contribution acceleration…
54%—Yes, always.
22%—It depends.
13%—Sometimes.
7%—Rarely.
3%—No.
I can't get much buy in for this and, again, it can be a compliance trap.
I mention it about 90% of the time. Depends on how I read the maternal instinct of the company.
100% of the time. Again, I feel it is absolutely in the best interests of the plan participants.
Same thing as I stated above, when we do education meetings, ppts say they want to increase, but then by the time they get back to their desk, they have 10 other things to do and it goes by the wayside. Auto-acceleration is the best way to stay on track for retirement.
Depends on the needs of the client
Why do I still find plans at 3% enrollment rate and no increase? Crazy.
It depends on if the plan sponsor has a 360 integration to allow for automation of escalation.
if working to solve a testing issue over time, auto escalation helps. also necessary when using QACA safe harbor...
It's more difficult to add auto escalation after the fact
Success depends upon the management of the payroll department staff. One needs to assess if the employer is capable of success in ongoing administration of the increased deferral rate adjustments.
Depends on the administrative capabilities of the employer
I often say automatic enrollment with 1% acceleration up to a max of 10%.
We do talk through administrative responsibilities and recordkeeper capabilities of tracking.
Sometimes it's tough just selling the auto-enroll and we need to go in stages...but I do introduce it.
It depends on group and goals. nothing is for everyone.
Peanut butter & Jelly. Makes no sense to have one without the other
Auto enrollment without auto escalation is a litigator's dream
Generally, I will recommend rate acceleration, but it could depend on workforce demographics and what I learn from participant 1:1's. If most employees are living paycheck to paycheck-which includes no emergency fund, or if I learn that there is a lot of credit card debt with their workforce, I prefer that they eliminate debt and build an emergency fund, before saving too much towards retirement. Have to take care of what is going to make life easier today before focusing too much on what could be 20, 30 or 40 years down the road. Of course, participants have to have the discipline to take the proper action
I'm not at the state-or-the art level of 1% every six months yet, 1% a year seems sufficient to me to fully exploit the accumulation potential of the young saver.
Sometimes, however, there are many administration obstacles that make it difficult.
1% each year to 15%. We find opt out rates remain the same when adding auto escalate.
Yes, it depends on the client. This is recommended significantly less than auto enrollment itself. We feel the client needs to first get comfortable with the auto enrollment before venturing higher.
RE: Reenrollment
And then, last but not least—we asked readers if they promote/recommend reenrollment (the subsequent automatic enrollment of those who have opted out of automatic enrollment at a subsequent date). And here, things slipped back a bit:
52%—Sometimes.
29%—Yes.
13%—Rarely.
6%—No.
If they have opted out, that was (sadly) their choice. I just keep after them during education sessions.
Periodically—every 3 or 4 years generally
Yes, because financial circumstances change, people forget they opted out....
While I may recommend, it is rarely elected by the Plan Sponsor.
Have not been able to get that one to the finish line often.
It is a good practice
Typically, when we onboard a new client, this is part of the discussion
Every 3 years is the suggestion
Will further recommend reenroll as part of an ACA implementation
If the recordkeeper can do it and HR can handle it
Too big brother-y.
Usually during a conversion
Many of our NPO sponsors have been reluctant to amend provision to allow this re-sweep but understand the potential implications and liability in the future if records are not maintained with deferral forms.
Sometimes employers opt out
That seems to be the toughest sell to clients
Depends on how aggressive they want to be, but we often argue if it's good for the goose, it's good for the gander
Especially early on in our involvement where there's an opportunity to improve participation and participant diversification.
Every 3-5 years is good.
Depends on demographics, plan metrics and objectives of the plan
Yes, by continuing to make them opt out, they will eventually join.
It definitely happens when there are new client personnel involved with the plan.
Have been bringing up re-enrollment for years and still find employers unreceptive
Other Comments
We’ll close things out with some truly insightful and inspiring observations from readers:
Automatic enrollment is wonderful but it does not always work well depending on the employee demographic/turnover.
In every Plan where i have been able to convince the Plan Sponsor of the value of autoenrollment, participation has increased greatly. Where it has been a disappointment is the Plan Sponsor who wants to set the limit too low, thinking participants will otherwise opt out. This has resulted in a higher percentage of contributing participants but a lower contribution amount overall.
Auto Increase is tough to monitor. Who has filled out a form that negates it, etc.....Also, make auto-increase occur on the same date for all employees is usually a much easier process. I wish we could do it with no prior year opt out, in other words, the participant has to opt out every year.
Still difficult to convince some plan sponsors that the employees won't mind the auto features and that they can take action if they don't want to be defaulted. I'm able to get through to most of them and the vast majority of my plans use auto enrollment and auto increase, but some clients continue to resist and then wonder why their participation rates languish. That is frustrating.
Sadly we just completed an in-depth analysis for a client to add AE for a tech plan, young and growing, that does not currently have match. The Committee had strong and polar opposite opinions on its value - in the end the senior committee member who got the ball rolling left and the other voices who feverishly belie participants need to make their own decisions prevailed because the driving voice/force for the change has departed. Their participation rate is 38%.
I find that plan sponsors are more willing to adopt auto-enroll than auto-increase. I try to promote ppt elected auto increase not plan forced auto increase.
Only concern about auto-enroll is the plan sponsor not being able to administer it properly and this typically when there isn't 360 payroll integration. For whatever reason most plan sponsors are hesitant to add auto-enroll and think somehow starting at 1-3% for a default rate is the natural place to begin
Some sponsors are leery about introducing the auto increase because they fear the employees will be in their office asking to have the money refunded.
Most of my plan sponsors elect auto enrollment without auto escalate. But I do believe it’s in the best interest of participants to do both. Unfortunately, it is complex to set up correctly and requires the company send in their full payroll report that many of our smaller plans resist.
Plan Sponsors today have benefit budget fatigue. Plan Participants don't have a negative nor positive reaction in our experience. HR and Benefit staff have a high attraction to auto features and have decided often that sync-ing immediate elig with implementing auto-enroll works best. Auto-escalate on DOH anniversary seems most popular along with 1%/yr. The auto-escalate max varies widely.
I have to know the Plan Sponsor would be able to properly administer auto enrollment. If they struggle with resources, I do not recommend.
I find that most of the pushback I get from plan sponsors comes in one of two buckets: 1) they are worried as to how it will affect their match obligation and 2) they do not want to handle all of the opt-outs or calls from someone who meant to opt out but had a contribution taken from their paycheck because they forgot to do so.
Can't wait for the Secure Acts to kick in.
Still seems to be the path of least resistance to substantially increase participation and savings rates across plans
I think automatic enrollment is absolutely wonderful in the setting, as is auto increase. The starter K provision would help as well with getting employers to do auto enrollment if they do not have to worry about how much they are putting in for the first few years of a plan. This year I've done 7 start up plans and prior to 2022 I had only had 3 in 8 years. It shows you where the employers are going to retain and attract talent.
Most plan sponsors are scared to implement but are generally surprised and happy after the fact.
Automatic designs are beneficial to help close the savings gap, and create positive participant outcomes. By removing the "hurdle" of participant action, we typically see participants maintain the deferral or become engaged and increase. While quick enrollment options have helped increase participation, autoenrollment continues to reach the full demographic. Plan sponsors are more open to implement as we continue to bring up the "paternal" approach of automatic designs. Of plans that implement, participation remains at 80-90%. Reception is still negative within low wage employee bases. We've had success with pairing auto-enrollment with savers credit education for low wage earners.
My market isn't quite suited for all of this.
The smaller employers project more fears that they will get push back from their employees. We have a campaign of webinars, on demand videos and a participant call center to assist the employees in the rollout of auto enrollment.
The last 2-3 years have been an eye-opening experience for sponsors and HR benefit groups particularly if plan and participant data / records were not complete on the RK system as well as the administrative burden on payroll if it’s not fully integrated with platform provider. Also, with turnover in HR/Benefit Groups and extended RK service teams, compliance issues and corrective actions have skyrocketed especially for plans with complex designs (dual eligibility, er contribution conditions, distributions/loan requests, etc.
Recognize that in extremely high turnover businesses like retail or food service that auto features cause enormous amounts of work for HR teams with little lasting impact on employees
Extremely useful to increase participation - unfortunately some cost-conscious plan sponsors look at the impact on the cost of matching and choose not to adopt auto enrollment—very real problem for small employers who do not have adequate systems to track and execute the auto enrollment. Manual efforts around auto enrollment are a problem especially if there is turn over within payroll or HR personnel.
Most employers believe that auto-enroll is a "force-in" program. We change the narrative and tell them it is not a force-in but a "Call to action". Human Resources is tired of chasing down employees for paperwork. This is simply asking the employees to take action or else they will be enrolled at 6%. Why 6%? It's because 3% has been shown not to incite action; however, somewhere between 6-7% makes an employee pay attention. In addition, 3% EE deferral plus whatever ER match is not enough to retire on. We also layer on a 90-day EACA to fight the argument that employees will beat down the down if auto-enrolled (very few if any EEs ever do that) This approach has now led to over 60% of our clients using auto-enroll. Auto-escalation is not as popular and only 10% of our clients have it currently.
I never get bad feedback from participants. I do often get pushback from plan sponsors who say their employees can’t afford more than 3% or something small. I do not feel this is often accurate just a baseless assumption.
I think a lot of it depends on payroll integration and ease of administration. Administrators/sponsors don't want any added burden and would balk if this increases work or the odds of making a mistake.
In the past....it was typically a client's philosophical reason to hold off, not to mention the challenges providers had in administrating it for them. Both of those aspects have changed, not to mentioned the Government is requiring it on all new programs. It really should be the "norm" to have auto-enroll and auto escalate. The re-enroll may take a little more time for everyone to buy in.
Creates other issues like beneficiaries not being added or other distribution issues.
In general we strongly promote auto features. When we do, and when implemented effectively with plan sponsor buy-in, we see great results in participation, deferral rates, and diversification.
Plan sponsors are more interested presently than they were 5 years ago
The different committee members always have different opinions when it comes to auto features. CFO/Controller types always ask about the cost. VP/Director of HR types almost always want to do it. Benefit Analysts/Payroll types worry about the administration burden. As an advisor, you need to understand your client's committee composition first, then you need to ask questions to understand the committee's concerns and employee demographics/culture. Once you have this info, you can make a recommendation. In terms of plan participants, from my personal experience, there is very little opt-outs or pushback for auto features in general. Furthermore, these figures go down even more if the committee has the advisor conduct employee education (pros vs cons at the participant level) on auto features.
If you look at most recordkeeper state, individuals in their 20s and 30s are FAR more ready for retirement than individuals in their 50s. The reason? Autoenrollment.
Automatic enrollment and auto escalation tend to be very challenging for most HR departments. You need to make sure you have a good integrated payroll solution in a 360 method.
We still have some plan sponsors who are philosophically (and deeply) opposed to auto enrollment. They feel it to be overly paternalistic and pushy. No matter how much we disagree with that, we respectfully provide our retorts and all of the research and empirical evidence why auto enrollment works so well... but... in the end, it's their plan.
They work
I find that all of our mid to large plans utilize auto enroll. It’s the smaller plans with less staff that tend to avoid it- mostly because of corrections required on missed deferrals.
Generally when added, we get no negative feedback.
Plan sponsors have a prejudice against in almost all initial conversations. Also not a good fit with all employers. It is definitely an education process.
As a TPA I loathe and despise auto enrollment. I understand the concept, and why it would be a valuable design option IF clients were actually able to do it correctly. However, in practice, the employer/payroll company/recordkeeper manages to mess it up EVERY SINGLE TIME it's instituted, leaving us to go through the prescribed correction methods.
Thanks so much to everyone who participated in this week’s NAPA-Net Reader Radar poll!
