PLANSPONSOR - October/November 2021 - 37

PLAN BENCHMARKING | AUTOMATIC FEATURES
with both features, after three years,
about half of the participants stuck with
the original plan design; 17% increased
their deferral rate above the auto-escalation
amount, then retained the feature,
and one-quarter increased their deferral
but dropped the escalation feature. In
sum, while half remained in the original
design, nine in 10 participants have
contribution rates above the default rate.
" Through our research, we observed
that the benefits of auto-enrollment are
further strengthened when combined
with other plan features such as increasing
minimum default deferral rates, or autoenrollment
sweeps, " says Jean Young, a
senior investment strategist at Vanguard
in Wayne, Pennsylvania. " As a result, we
encourage plan sponsors and advisers to
harness the power of participant inertia
and adopt automatic plan features that can
further improve retirement outcomes. "
Meghan Jacobson, head of
U.S. insights for J.P. Morgan Asset
Management in New York City, agrees that
the idea of automatic 401(k)s designed to
make everything easy was implemented
with the best of intentions. But, she says,
" One thing we've discovered through
research is the unintended consequences
of auto-enrollment. The automatically
enrolled participant contributes on
average around 3% unless some other
action is taken. Even if a 21-year-old right
out of school starts at a 3% savings rate,
unless it is paired with auto-escalation, it
probably won't get them to the finish line
at retirement. They could take advantage
of a match or stretch match to avoid being
anchored at 3%. Many advisers recommend
participants start at least at 10% to
get the full bang for their buck. "
Another such consequence involves
Millennials-known to change jobs
often. " One thing we forget is, if I jump
from one firm to another every year or
two, with auto-enrollment I'll likely be
put back to that starting line of a very low
rate, " Jacobson says. So communication
with the sponsor about the rate at enrollment
is key. -Judy Faust Hartnett
To Further Improve Outcomes
ALL
THINGS being equal, stronger
default designs will help improve retirement
outcomes because of the effect of
inertia. PLANSPONSOR asked Abigail
Russell, vice president and adviser at
CAPTRUST, in Raleigh, North Carolina,
about automatic feature strategies that
sponsors and their advisers can use:
PLANSPONSOR: Can setting the automatic
enrollment default either lower or
higher than what a participant might elect
negatively affect that person's savings and
participation?
ABIGAIL RUSSELL: When it comes to
auto-enrollment, the key for plan sponsors
is to find the right balance to help participants
save. In general, setting the rate too
low can affect a participant's ability to save
enough for retirement. While it's common
for sponsors to set 3% as the default rate,
we would typically suggest a rate at 5% to
6%, which can help participants accumulate
savings faster. On the other end of the
spectrum, we typically see a 10% deferral
rate as the tipping point where participants
start opting out or choosing a much
lower deferral rate.
PS: Can employees mistakenly believe
that auto-enrollment will take care of their
retirement saving needs and become disengaged?
How can this pitfall be avoided?
RUSSELL: Many-particularly younger-
employees do assume auto-enrollment
takes care of all of their retirement saving
needs. They may assume this deferral
amount will get them to a comfortable
retirement without saving additional
money on their own or doing some
personal retirement savings forecasting.
And while this may be true for some,
the reality is that they still need to put in
time and energy to understand how much
money they will need, to retire.
One way to avoid this pitfall is to autoenroll
employees at a low enough rate that
people don't opt out, and then pair autoenrollment
with an annual auto-escalation.
In general, 1% is the most common
increase we see, and it's often timed with
an annual merit increase so people can
benefit from a larger paycheck while deferring
1% more. It's also important to provide
education, and ideally personalized advice,
to make sure employees really understand
their individual retirement savings needs.
Educating participants about the importance
of saving, investing and planning as
they prepare for retirement is critical.
PS: Can a participant miss out on a match
with auto-enrollment?
RUSSELL: Yes. For companies with a
match, if a participant is auto-enrolled at
a rate that is lower than the deferral rate
needed to receive the full match, that
employee would leave some employer
contribution money on the table.
PS: Besides going back to a low default
deferral rate each time they change jobs,
how can job hoppers be negatively affected
by auto-enrollment?
RUSSELL: Those who job hop every few
years may not be with an organization
long enough to understand they've been
auto-enrolled and may accumulate only
a few thousand dollars[, which might be
eligible to be cashed out]. They can face
hefty tax bills if they're sent the savings
when they leave the job. Or they could
be forgetting they have other retirement
savings accounts all together. Sponsors
can help mitigate this through education.
When an employee leaves, send clear
directions about what will be happening
to the current account and what the
person should consider, to avoid paying
taxes or hefty penalties. -JFH
PLANSPONSOR.COM October - November 2021 37
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PLANSPONSOR - October/November 2021

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