When Schwab Retirement Plan Services’ plan clients perform a re-enrollment, they typically include current participants and nonparticipating eligible
employees. All are re-enrolled into the qualified default invest-
ment alternative (QDIA). Those saving below the default
deferral rate are increased to that rate. “It gets more people
closer to success,” says Nathan Voris, a managing director at
Schwab “And we see very little, if any, participant backlash.”
Aon Hewitt’s biennial Trends and Experience in Defined
Contribution Plans Survey shows that the percentage of
employers doing a backsweep—re-enrolling eligible nonpar-
ticipants—has held steady in the past several years in the 14%
to 16% range, says Rob Austin of Aon Hewitt. “About half of
those companies do it as a one-time sweep, and the other half
keep re-enrolling people every year,” he says.
Principal Financial Group strongly believes in plans doing a
backsweep of eligible employees every year, because employees’
reasons for not saving often get eliminated over time, says Jerry
Patterson of the firm. “We did some participant research, and it
found that 80% of participants said they had a neutral or positive
reaction to plan sponsors re-enrolling employees who had opted
out of the plan,” he says. “They said it didn’t upset them.”
Schwab finds the “stick rate” of a backsweep usually runs
in the 85% to 95% range of employees, Voris says. “The No.
1 piece of feedback we get from sponsors about a sweep is, ‘I
don’t want to make my participants angry,’” he says. “But if
someone opted out of the plan seven years ago, chances are that
the reasons for that person have changed since then.”
According to Lynda Abend of of John Hancock Retirement
Plan Services, opt-out rates over the long term for a backsweep
follow an interesting pattern. “We find that, when our clients
use a default deferral rate of 3% in a sweep, the long-term opt-out
rate is 10%,” she says. “If a sponsor does a sweep at 6%, the long-
term opt-out rate is 4%.” She attributes the lower opt-out rate
accompanying a higher-deferral re-enrollment to the tendency of
participants to get more enthusiastic about saving for retirement
once they start accumulating a substantial account balance. A
higher initial deferral builds the balance more quickly.
Among Principal’s plan clients, the average participation
rate runs 7% higher for plans that implement a backsweep
along with auto-enrollment of new employees, versus only auto-enrolling new hires, Patterson says. “And we see a 17% higher
average deferral rate for plans that implement a sweep,” he says.
Re-enrollments that include both low-deferring participants and nonparticipating employees substantially boost the
percentage on track to, when including Social Security, replace
at least 70% of their pre-retirement income, John Hancock finds.
Among its plan clients that do re-enrollment that way, “There is a
10-percentage-point improvement, on average, in the percentage
of participants being ready for retirement,” Abend says.
On the downside, employers often worry about how a backsweep will impact their costs, Austin says. “You can bet you are
going to see an increase in participation. So the company needs
to put in more match money for those new participants, which
is a hard-dollar expense for the employer,” he says. “This is one
reason why some companies set a low initial default rate.” An
employer may e.g., match up to 6% of pay but do a backsweep at
a 3% default deferral ad couple it with auto-escalation.
“So the longer employees stay with the company and the
plan, they will get auto-escalated and get up to the 6% match,”
he adds. That way, he says, employers ensure that they concentrate their match money on longer-tenured employees.
Employers doing a backsweep and worried about employees
feeling frustrated should clearly explain the rationale to anyone
affected, Patterson suggests.
“They’re concerned that employees will think, ‘You’re
being Big Brother, and redeciding an issue that I’ve already
decided for myself,’” he says. “It’s important to position this
as something the plan sponsor is doing because it cares about
employees’ financial well-being,” he says. “We also emphasize
with employees that we don’t assume one size fits all, so we
give them tools that they can use to figure out whether this is
right for them.” —Judy Ward
“But if someone opted out
of the plan seven years
ago, chances are that the
reasons for that person
have changed since then.”