Data & Research June 14, 2024

Many Workers Don’t Realize They Are Not Contributing to Workplace Plans

Principal examined the reasons that 59% of nonparticipating employees assumed they were saving in their retirement plans.

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Many nonparticipating employees, 59%, thought they were saving for retirement through their workplace plans, according to a recent study by Principal Financial Group.

Among the respondents who believed they were saving for retirement in workplace plans but weren’t, 49% thought they were automatically enrolled, 41% assumed they signed up themselves and 77% said they started saving as soon as they were eligible for the plan, according to Principal’s “Top Barriers Preventing Americans from Saving for Retirement” study released June 6.

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If an employee thinks they’re enrolled but they’re not that usually means there’s a plan design issue, a miscommunication or both, says TJ Arcuri, retirement plan consultant at SageView Advisory Group.

“We’ve seen plans that offer a 3% nonelective contribution, meaning the eligible participant does not have to enroll to receive the contribution, so the participant thinks they’re actively participating because the account is funded,” he explains. “But in reality, they’re not.”

Therefore, some plan sponsors have changed their design from a nonelective contribution to a matching structure to encourage participation, but also eliminate any design confusion, Arcuri says. There is also confusion when it comes to eligibility, Principal found in its report. Of the respondents, 22% were unsure if they qualified for benefits, with 35% being from Generation Z.

Based on Principal’s survey, people who have held many jobs in the past may be the cause of the uncertainty. With 40% of respondents claiming to have had more than one job in the previous five years, the report stated they may have been exposed to various retirement plan features, such as auto-enrollment, and took for granted that these features applied to all plans.

Digital Divide

“The proliferation of direct deposit over the years no longer gives employees a regular reminder of what’s being deducted from their paychecks,” adds Chris Littlefield, president of Retirement and Income Solutions at Principal. “Almost nobody gets a paper paycheck anymore and, as a result, there is another blind spot for workers who believe they are participating when they are not.”

Principal’s report recommended designating a specific time, like during benefits election period, to discuss enrollment. When it comes to their benefits, almost half (49%) of the nonparticipating employees asked said they would be willing to enroll if given the chance each year. Those without a retirement plan and those who were younger and paid less were more likely to select this choice.

Additionally, 46% of respondents indicated that they would be curious to learn about enrollment during the time of performance reviews. Pay raises typically coincide with performance reviews, so it could be beneficial to include a retirement plan enrollment conversation to assist staff members in making decisions based on their new pay rate, Principal recommended.

SageView’s Arcuri notes that he has seen plans that do not auto-enroll newly eligible participants, and offer an employer match, but have a plan entry or eligibility language that makes the participant assume they’ll be auto-enrolled when they are not.  

“As a result, we have worked with plan sponsors to improve on boarding education pieces and annual webinars eliminate confusion and stress the importance of taking action to enroll and how to enroll easily at that,” Arcuri says.

Power of Personalization

Principal’s report further highlighted the power of personalized communication to alert noncontributing employees that they’re not actively participating. Personalization can include plan name, specific date on their enrollment status or deferral percentage and other data points to help workers through different life phases.

Principal called for increasing communication throughout the year and utilizing a range of channels to connect with nonparticipants at the appropriate moment. Employers should examine the timing and method employees are being offered perks, and search for any scheduling gaps.

Finally, the report proposed increasing the frequency of automated reminders sent to people who begin the enrollment process but then abandon it.

“We already know automated features – including auto enrollment, auto increase of an employee’s contribution rate, and auto-sweep – play a critical role in moving the needle to help create better outcomes for employees,” says Littlefield. “This is the easiest and most simple way to get people on a positive path.”

He states that plans using auto enrollment are at least twice as likely to achieve 90% participation versus plans that do not automatically enroll participants – with less than 10% of workers opting out of retirement plans when being automatically enrolled upon their hiring.

“We applaud the provision from SECURE 2.0 requiring new retirement plans to implement automated features, but now we need more employers with existing plans to embrace good retirement plan design that creates better outcomes for their employees,” Littlefield concludes.

Compliance June 14, 2024

DOL Backs Unenforceability of Class Action Waivers

The regulator filed an amicus brief with the 6th Circuit in May arguing that class action waivers in plan agreements are not legally valid.

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The Department of Labor filed an amicus brief to the U.S. 6th Circuit Court of Appeals in May which argued that a mandatory arbitration provision in a 401(k) plan document is unenforceable if it is tied to a class-action waiver.

The case in question is Tanika Parker et al. v. Tenneco, Inc., et al. First brought in April 2023, the suit alleges that Tenneco and its affiliates maintained a plan with excessive fees. Tenneco argued that the case should be sent to arbitration individually, per their plan documents.

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The district court disagreed, because the combination of mandatory arbitration and a class action waiver compels the participant to forfeit a statutory right, namely to secure plan-wide relief for fiduciary misconduct.

The defendants then appealed to the U.S. 6th Circuit Court of Appeals. The DOL filed an amicus brief for the case in December 2023 at the appeals court. The department argued that “the district court correctly refused to compel arbitration because the Arbitration Procedure includes a non-severable provision precluding Plaintiffs from obtaining in arbitration the very relief that ERISA expressly allows them to seek in court,” that being plan-wide remedies.

The DOL asked the court to uphold the ruling that “the Representative Action Waiver is unenforceable because it prevents the effective vindication of Plaintiffs’ statutory right to seek plan-wide relief.”

In May, DOL sent a supplementary amicus brief to the 6th Circuit. This was in reaction to a decision of the U.S. 2nd Circuit Court of Appeals, which ruled in another case, Cedeno v. Sasson, on May 1 that the class action waiver was unenforceable. The DOL wrote that the plaintiff’s “avenue for relief under ERISA is to seek a plan-wide remedy, and the specific terms of the arbitration agreement seek to prevent Cedeno from doing so,” which renders the agreement unenforceable.

The U.S. 3rd and 10th Circuit Courts of Appeal have also previously ruled this way in similar cases.

The Supreme Court in October 2023 declined to hear two cases concerning the enforceability of mandatory arbitration and class action waivers in plan documents. Those cases, from the 10th and 3rd Circuit Courts of Appeals, the defendants’ moves to force individual arbitration and prevent a class action remedy were denied.

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