Addressing Auto Holdouts

Automatic enrollment and escalation are key factors in the growth of 401(k) retirement savings and so widely accepted that they will be mandatory next year for plans penned after the SECURE 2.0 Act of 2022 for more than 10 employees.

But while many in the industry take these auto features for granted, there are still plan sponsors who resist the automatic setup, potentially due to the employer match being costly or for resistance to making the deferral decision for participants, according to advisers and some plan sponsors survey results.

And while recent statistics show that plan sponsor’s use of auto-enrollment are at highs even before the mandates kick in, a total of 59% had adopted the feature as of year-end 2023, according to Vanguard’s How America Saves report. Notably, that rate jumps to 77% when only looking at plans with 1,000 or more participants.

What, then, is a plan adviser to do with clients who have existing plans that don’t want to offer auto-enrollment or escalation?

“In cases where I have clients who say no, we don’t want to do that, I will take the chance to bring it up again during plan health reviews,” says Lisa Drake (Garcia), a retirement plan consultant with SageView Advisory Group. “At that time, I will present to them what their peers in the industry are doing and how successful [auto enrollment and escalation] are for them. There are almost always more pros than cons.”

Drake notes, however, that auto-enrollment can be a tough sell for a large firm with a safe harbor plan that requires a company match because of the added cost. In these cases, she will let them know that if they increase participation, they don’t need to be in a safe harbor anymore because they can pass nondiscrimination plan testing.

Complications

There is, however, are further complicating factors for some employers. In Florida, where Drake is based, some firms are dealing with large seasonal workforces that, if auto enrolled, may not return the following year and have small sums sitting in accounts. In these cases, Drake says she advises clear and consistent communication about the plan and its benefits, and offers solutions such as ‘easy enroll.’

“We see these types of financial wellness efforts can help improve participation,” she says.

Overall, Drake says, there are “more companies that will benefit than not benefit” from automatic features.

Matthew Compton, partner, retirement solutions at Brio Benefit Consulting, an Alera Group Company, notes that conversation around auto enrollment feels like a blast from the past—specifically, 2006, when policymakers approved through the Pension Protection Act a qualified default investment alternative safe harbor. At that time, putting participants into automatic default was a conversation advisers were having with plan sponsors around the country.

“It’s hard to believe that auto enrollment has been around for 18 years,” Compton says. “Back then, HR people were worried about taking money out of people’s accounts without their consent—they meant well because they were trying to protect the plan participants.”

Fast forward to today, Compton notes, and automatic enrollment and escalation are so successful that policymakers felt strongly enough to make them mandatory provisions for most employers. For his own practice, he says, it’s almost as equally mandatory for plan design to ensure a plan sponsor is doing everything it can for participants.

“The outcome of implementing auto is significant, and the industry statistics show us that,” he says. “If you are allowing plan sponsors to opt out of it, then you have to start asking the question, ‘what are we really trying to accomplish here?’”

Not When, But How Much

Compton says some of his clients have resisted auto in the past, particularly if the plans have been around for awhile. In that case, he and the team will make a strong case for auto enrollment, noting how not doing so will put the plan sponsor behind industry peers and ultimately be a disservice to their participants.

“It’s really no longer a question of whether we should be doing it, but at what rate we should be doing it,” he says, noting that a plan sponsor will ideally start automatic enrollment at 6%, with auto escalation built in as well.

Barnaby Horton of Merrill Lynch Wealth Management notes that plan sponsors are “more than ever looking for ways to help their employees,” and auto-enrollment is a key tool that his firm has been bringing to clients for years to meet that goal. Even so, they have seen clients turn down the option many times.

“If this is the case, our strategy is to be pleasantly persistent,” says Horton, a senior vice president, wealth management adviser and defined contribution investment consultant. “For these clients, we keep the item on subsequent agendas and annual reviews and revisit the issue several times.”

More recently, Horton notes, their recommendation for auto-enrollment has become stronger for a few reasons. First, he notes, “plans that have failed testing have adopted automatic enrollment and in virtually every case, have improved the ability for (highly compensated employee) to increase their deferral, and in many cases, max their deferrals.”

Second, he notes, is the auto-enrollment mandate in SECURE 2.0.

“Clients with existing plans have told us that they are more comfortable knowing that other companies are implementing [SECURE] 2.0, so the recent changes in the law have really helped,” he says.

SageView’s Drake notes that automatic features, especially with the company match, are also an important factor in combatting the savings gap among minority populations. These groups, she notes, may not have had access to, or aren’t saving in supplemental, tax-advantaged vehicles beyond Social Security.

“It helps provide access to that population that has been kind of left behind,” she says. “Once people get used to it, and it may be a few years from now, I think [auto-enrollment] will be the norm and people will understand it.”