Data & Research December 4, 2017

Sixty Percent of Plans Automatically Enroll Participants

While 66% of larger plans use automatic enrollment, only 51% of smaller plans do.

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Automatic enrollment is used by the majority, 60%, of all retirement plans, according to the Defined Contribution Institutional Investment Association’s (DCIIA’s) report, “DCIIA Fourth Biennial Plan Sponsor Survey: Auto Features Continue to Grow in Popularity.”

Among larger plans, those with $200 million or more of assets, 66% use automatic enrollment, but among plans with less than $200 million, only 51% do. “Future growth in the adoption of auto enrollment will, therefore, likely come from smaller plans,” DCIIA says.

Among plans with automatic enrollment, 93% use it for all new hires. In 2010, 55% of plan sponsors automatically enrolled participants at a 3% deferral rate. By 2016, that had fallen to 32% of plan sponsors. Conversely, sponsors using a 6% deferral rate rose from 9% to 28% in that timeframe.

Fifty percent of plan sponsors use automatic escalation, and of these, 25% set it as the default, rather than ask participants to opt into automatic escalation. However, 58% of large plans use automatic escalation, compared to 40% of small plans.

Among plans with automatic escalation, the majority raise deferrals by one percentage point a year.

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Less than 20% of sponsors conduct re-enrollment, which DCIIA attributes to low recordkeeper turnover.

DCIIA then examined the effects of the use of automatic enrollment and found that prior to its adoption in 2006, only 11% of plans had participation rates over 90%. By 2016, that had risen to 46%.

Only 44% of plans without automatic enrollment and escalation have savings rates of 10% or more, including both employee contributions and the company match. Among plans with automatic enrollment, that rises to 67% with savings rates of 10% or more—and when that is combined with automatic escalation, that rises to 70%.

“Moreover,” DCIIA continues, “the percentage may reasonably be expected to increase over time as more plans adopt these auto features and, since by their very nature the features become more impactful over time.”

DCIIA also notes that the opt-out rate among participants from automatic enrollment and escalation is “de minimus’’—running counter to sponsors’ fear of employee backlash.

DCIIA then tried to examine what might impede sponsors from adopting automatic features further, and discovered that slightly more than half of small plan sponsors do not think they are necessary. Forty-five percent of plans are worried about the additional cost of automatic enrollment, and 26% are concerned about the additional cost of automatic escalation.

To overcome these barriers, the industry needs to educate sponsors about the benefits of automatic features, DCIIA concludes. “Only then will the full potential of DC [defined contribution] plans be met, and will plan participants achieve the retirement security they deserve,” DCIIA says.

The findings are based on a survey of 194 sponsors that DCIIA conducted from late fall 2016 through early 2017. The report is here.

Columnists December 1, 2017

Ways and Means Democrat Introduces Long-Shot Bill Expanding MEPs

Almost any bill floated by a Democrat is going to be a long shot in the current political environment, but proposals submitted by Representative Richard Neal, ranking member of the House Ways and Means Committee, enjoy broad support among the investment business and lobbying community.

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A bill introduced by House Ways and Means Committee Ranking Member Richard Neal, D-Massachusetts, and known as the “Automatic Retirement Plan Act of 2017,” is garnering the support of retirement plan industry lobbying groups.

Similar to a host of proposals Neal has submitted during his tenure on Ways and Means, the act would remove legal and regulatory barriers, allowing plan sponsors to more fully embrace the use of multiple employer plans (MEPs), including “open MEPs.” Among other adjustments viewed as vital to the expansion of open multiple employer plans, the bill removes the “one bad apple” rule and the commonality requirement, as well as other potentially onerous and costly fiduciary and administrative duties.

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In commentary on the proposal offered by the Insured Retirement Institute (IRI), Cathy Weatherford, IRI president and CEO, cites data showing that nearly half of employers support a reduction in the legal risk assumed when sponsoring a retirement plan.

“IRI supports this bill because the changes made by this legislation will result in more small businesses offering a retirement savings benefit to their employees and, as a result, will greatly expand the number of workers with access to a workplace plan,” Weatherford suggests. “The bill will also increase automatic savings and escalation features for American workers. Studies have shown that automatic enrollment is extremely successful in getting people to save for retirement with participation rates at least 10 percentage points higher in plans with automatic enrollment than those without it.”

Weatherford says IRI further supports this bill because it will “provide employers with a greater ability to automatically enroll their employees in 401(k) plans with an option to opt out of participation, while at the same time providing help to employers by defraying some of the cost of offering and maintaining such plans with tax credits.”

The proposal from Neal includes other potentially important changes. In particular, the bill includes various provisions to promote higher rates for automatic enrollment and more aggressive automatic deferral escalation.

“IRI also commends Representative Neal’s continued focus on promoting and enhancing our nation’s retirement security with his [separate] introduction of the Retirement Plan Simplification and Enhancement Act of 2017,” Weatherford adds. “This legislation includes many additional innovative ideas [that] would help Americans to save for retirement by expanding coverage, increasing retirement savings and preserving income.”

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