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.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

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.

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.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

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

«