PLANSPONSOR - August/September 2018 - 24

" Auto-enrollment serves a wonderful role, especially if the
employee has a short, or no, eligibility period, " says Catherine
Collinson, CEO and president of Transamerica Center for
Retirement Studies (TCRS) in Los Angeles. " New hires can start
saving immediately, making it convenient for people to join the
plan and avoid the procrastination factor, especially when they
are starting a new job and there are many details to attend to. "
But auto-features can also give participants a false sense of
security, a problem compounded when the plan design is inadequate
to help participants reach the 10% to 15% income savings
rate that experts recommend. If the design is structured to help
the savers who would struggle to achieve that rate, is there an
implicit assumption that participants will need to engage with
the plan in order to succeed? And does treating all new hires
the same-ignoring previous job tenure and possible DC plan
participation-lessen automation's positive effects?
According to the 2017 PLANSPONSOR Defined Contribution
Survey, auto-enrollment has been used in 40% to 43% of
responding plan sponsors' plans for the past five years; automatic
escalation-an increase in participant deferral rates on a
periodic, usually annual, basis-is used in 33.6% of plans, up
from 29.3% in 2014, says Brian O'Keefe, director of research and
surveys at Strategic Insight and the DC survey's author.
The survey also indicates that 44.7% of employers have their
auto-enrollment plan default stalled at 3% or less; though, for
plans with a rate over 3%, an upward progression can be seen:
from 36.7% of plans in 2013 to 46.3% last year.
If a participant moves to a firm with an auto-enrollment
plan, he will need to take no action. But if the default deferral
rate there is below what he contributed to his previous plan, he
has decreased his savings rate, Carrington says. " The problem
will become more pervasive in the future, because more plans
will offer auto-enrollment and escalation, which means it's more
likely that employees will be auto-enrolled and then auto-escalated,
and then change jobs and start over again, " he says. " If
people just have typical job tenures and pass through plans and
auto-enroll and auto-escalate, it can cost them, over the course of
their career, 1 to 2 percentage points of savings, changing jobs
and starting over at a lower level. " (See chart below.)
Maintaining Momentum
Sources suggest plan sponsors consider plan design elements and
education that can help participants stay on track and engage with
the saving process when they switch jobs and employer plans.
To start, all sources agree that sponsors need to adopt
more robust auto-enrollment and auto-escalation policies that
can help plan participants save at an annual rate of 10% to
15%. Defaulting participants at 3%, and auto-escalating them
to 8%, for example, even if they receive a matching contribution
from their employer, will not move their retirement security
needle far enough, says adviser Josh Itzoe, partner and
managing director of Greenspring Advisors in Baltimore,
and the 2018 Retirement Plan Adviser Small Team of the Year
winner. Starting at a more aggressive rate-sources suggest 6%
to 10%-will reduce the probability that people will spend too
much time saving too little. But this will not solve the drop in
savings rate participants can experience when changing jobs.
Another approach is to set up an age-based auto-enrollment
schedule with differentiated rates, says Christine Loughlin, a
partner at NEPC in Boston. This can get new hires saving at a
The Impact of a Variable Employment Tenure
With traditional automatic enrollment safe harbor plans, participants are defaulted at a 3% deferral and are escalated
1% per year, to 6%, over the course of four years. However, a typical worker, averaging a median employer tenure
over his working career, will have an average net deferral rate much lower than the maximum 6%, due to " starting
over " at each job change. In this hypothetical scenario, the participant would end up with a mean deferral rate of only
4.85% over his career-despite repeatedly hitting the maximum escalation deferral of 6%.
10%
8%
6%
4%
2%
1
4
7
10
Source: Franklin Templeton Institutional
13
16
19
22
EMPLOYMENT YEARS
25
28
31
34
37
40
4.85%
24 PLANSPONSOR.com August-September 2018
DEFERRAL PERCENTAGE
http://www.plansponsordigital.com/plansponsor/august-september_2018/TrackLink.action?pageName=24&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - August/September 2018

Table of Contents for the Digital Edition of PLANSPONSOR - August/September 2018
