Researchers Find Little Cost Difference from Auto-Enrollment
A report suggests employers that use automatic enrollment in their defined contribution retirement plans may be using deferral and match rates that offset the costs of higher participation.
Automatic enrollment is often expected to increase employer
compensation costs as previously unenrolled workers start to receive matching
retirement plan contributions, but researchers have found this not to be
true.
Using cross-sectional variation in plan features and costs,
derived from the National Compensation Survey, researchers Barbara A. Butrica,
from the Urban Institute, and Nadia S. Karamcheva, from the Urban Institute and
the Institute for the Study of Labor (IZA) in Bonn, Germany, found no evidence
that total compensation costs or DC plan costs differ between firms with and
without automatic enrollment. This is the case even though automatic enrollment
is associated with a seven percentage point higher plan participation rate.
The research reveals that plans with the automatic
enrollment feature offer on average 0.38 percentage point lower maximum matches
to their employees. Given an average wage of $26.20, average participation rate
of 68.7%, and an average maximum match of 3.2% in the study sample, the
researchers calculated that the 0.38 percentage point lower match rate
translates into a savings of roughly seven cents per labor hour. They note that
this offsets the additional costs of 6.5 cents resulting from higher
participation rates.
The research also showed employers with auto-enrollment
plans are setting the default contribution rate well below the rate needed for
the maximum match. “This allows them to contribute to the accounts of more
workers without necessarily increasing their costs. Our findings suggest that
employers might be doing exactly this,” the researchers say in their report.
However, they note that more information about the actual employee
contributions and how they differ from the defaults is needed in order to
quantify correctly the contribution of this factor to the total difference in
costs.
The researchers hypothesize that if automatic enrollment
increases productivity, either directly by affecting the production function
and resulting in a positive marginal revenue or cost savings or indirectly by
increasing the marginal product of labor, then some of the gains might be
passed to employees in the form of higher employee compensation—further adding
to the increase in total compensation costs associated with automatic
enrollment. However, since they found no evidence that total compensation costs
differ between firms with and without automatic enrollment, they concluded that
firms might be lowering their maximum match rates and default match rates
enough to completely offset the higher costs of automatic enrollment.
The research report, “Automatic Enrollment, Employer Match
Rates and Employee Compensation in 401(K) Plans,” is available on the Social Science
Research Network website.
By using this site you agree to our network wide Privacy Policy.
Advisers Gain Congressional Allies in Fiduciary Definition Debate
A
number of elected officials have emerged on the side of financial advisers in
opposing the Department of Labor’s fiduciary redefinition effort—introducing ambitious
legislation to block changes to the fiduciary standard.
Representative Ann Wagner (R-Missouri) is the latest member
of Congress to introduce a largely symbolic bill seeking to halt or slow the Department
of Labor’s effort to widen the scope of fiduciary advice rules.
Wagner’s bill is called the Retail Investor Protection Act (RIPA),
and was submitted for consideration in the U.S. House of Representatives just a
few days after President Obama jumped
unrestrained into the fiduciary redefinition debate through a widely
reported speech to the AARP. Urging the Department of Labor (DOL) to move its
rulemaking language to the Office of Management and Budget for preliminary
review, the president suggested a crackdown is imminent on widespread conflicts
of interest tarnishing the brokerage and advisory industries.
While the administration and the Department of Labor have insisted
that, as phrased in a recently published DOL
fiduciary definition FAQ, “advisers giving sound advice deserve to be well
paid for the important work they do,” many brokers and advisers have strongly rejected
the president’s claims of substantial impropriety plaguing the advisory
business. Like Representative Wagner, they feel the Obama Administration and financial
industry regulators are vastly overstating the frequency of bad advice—which is
already policed closely by any number of state and federal enforcement agencies.
Challengers also suggest the administration’s concept of making
more advice providers into fiduciaries will cause more harm than good—driving quality
advice out of reach of low-balance savers, who will be forced to go it alone on
critical retirement planning decisions; for example, when contemplating an individual
retirement account (IRA) rollover.
“Earlier this week, President Barack Obama and Senator
Elizabeth Warren [D-Massachusetts] presented a solution in search of a problem
by proposing another massive rulemaking from Washington that will harm
thousands of low- and middle-income Americans’ ability to save and invest for
their future,” Wagner says. “This top-down, Washington-centered rulemaking
against financial advisers and broker/dealers will harm the very middle-income
families that Senator Warren and President Obama claim to protect.”
A summary on Wagner’s website suggests the legislation would
follow the same
structure as legislation passed during the last Congress that would have
required the Securities and Exchange Commission (SEC) to move first in issuing new
financial advice rulemaking under Section 913 of the Dodd-Frank Act. SEC action
would be necessary before the DOL could then propose a rule expanding the
definition of a fiduciary under the Employee Retirement Income Security Act (ERISA).
The bill, in effect, draws a line and puts the SEC at the
head of it, allowing the commission to propose its definition of fiduciary, and
stopping the DOL from any rulemaking on a fiduciary definition under ERISA
until 60 days after the SEC’s definition takes hold. Dodd-Frank authorizes the
SEC to set rules on fiduciary standards of conduct, extending them to
broker/dealers.
Slowing any final rule changes by DOL, the SEC would be
required to follow up on a 2011 analysis to look into potential issues that could
arise if the two agencies sought to establish a uniform fiduciary standard,
especially in regards to investor harm and access to financial advice products.
This study would have to be concluded before a new fiduciary definition could be
adopted. And finally, Wagner says the SEC would be required to look into
alternatives outside of a uniform fiduciary standard that could help with
issues of investor confusion.
Given the fact that it would be President Obama himself who would
sign the RIPA legislation into law, it’s not very likely the bill will actually
stymie the fiduciary redefinition effort—especially given the president’s strongly worded
commentary. However, as noted by Anthony Franchimone, a principal at Retirement
Benefits Group (RBG), introduction of the bill is not an entirely futile
gesture: it makes a critical point about the good the advisory industry does
for millions of Americans.
“This is a proposed rule that will punish an entire
industry, rather than just the few individuals who [the president and DOL]
consider to be bad apples,” Franchimone tells PLANADVISER. “Who will suffer the
most if the fiduciary rule is passed? It will be retirement plan participants,
small investors and advisory firms that work to provide education and guidance
to employees in their plans.”
Franchimone says Congressional action can serve as a guidepost for opposition to the DOL fiduciary redefinition effort, especially during
the critical public comment phases that DOL says will have a substantial impact on any
final language. Looking beyond the concept of using RIPA to stall the DOL’s
fiduciary redefinition effort, he feels it is a sensible approach to explore
the potential for more uniform advice standards across channels and regulators.
“It would bring much more simplicity and
understanding to the advice industries,” Franchimone says. “It’s probably the
case today that many retirement plan participants and retail investors out there
already believe there is a uniform standard applying to professionals giving
investing advice. It’s certainly a more commonsense approach.”
Franchimone says he and many colleagues at Retirement
Benefits Group are concerned that both the DOL and President Obama appear to
discount the importance of freedom of choice when it comes to working with trusted
brokers and advisers.
“Of course rules need to be in place to make sure things are
done the right way and in a transparent way, but at the end of the day, you and
I should be able to choose who we want to work with in getting financial advice,” he says. “What we want to
avoid most is for a participant to be told all of a sudden they can’t work with
a trusted adviser or broker anymore, and that this adviser can’t help you decide how you
want to move money out of the plan as you approach retirement. I think that would be a
huge mistake.”
He points to an example from his own practice where such a loss of advice could happen.
“I was recently in a committee meeting with a client that is
a physicians group—a bunch of doctors are in the plan,” he says. “In their
particular case, they happen to really favor and utilize the brokerage window in
the plan, and we don’t handle any of that, as the plan fiduciary.”
When giving the plan committee a legislative update last week,
Franchimone took a poll and found all the participants in the room had their
own trusted broker who they worked with independently of the plan, in a
non-fiduciary arrangement.
“The problem is that if Doctor X, for example, was working with this non-fiduciary broker at Merrill Lynch or LPL or wherever for the last 15
years, it would of course be good for that to be a fiduciary relationship, but
if it comes down to a matter of the broker not willing to become a fiduciary
under a new rule, is the participant better off?” Franchimone asks. “There are
abuses out there that obviously need to be addressed, but we really want to
make sure that the regulations don’t move ahead to a point where someone like
Doctor X is suddenly barred from continuing this long-term, trusted relationship.”
He says this is just one example of how a substantially strengthened
fiduciary standard could actually harm the people it’s trying to protect.
“The other side of this coin that we talk about a lot is the
collateral damage that could happen to the small-balance individuals,” Franchimone
notes. “Some of these people are able to get some help today if there is a dedicated
consultant on the plan to help them with rollovers or whatever else. But if
they don’t have this fiduciary access, who is going to take care of them? If
they can’t call up a broker and ask for a little bit of advice, where can they go?”
The text and procedural history of the Retail Investor
Protection Act are available here.