Employee Benefits | FJG/FYI
Got Auto-Enrollment? A Case Study in Improving Plan Participation
Low 401(k) participation rates are a chronic problem for plan sponsors. In many cases, this low participation can result
in a failure of the plan’s nondiscrimination
tests. Often the test results end up creating refunds to highly compensated employees. For plans that struggle from year to year to improve participation, one feature that can help immensely is the automatic enrollment option.
Automatic enrollment is a plan feature in which an employee who meets the plan’s eligibility criteria is automatically enrolled into the plan at a default salary deferral percentage and into a default investment option. Of course the employee can always change their deferral or investments, even if they opt out of the plan altogether. However, automatic enrollment helps participants overcome the two biggest obstacles to high participation rates – inertia and indecision. Since participants have to actively opt out of a plan in order to not participate, inertia and indecision actually help to improve participation rates! Consider this example of a company whose plan participation had languished below 30%. The company was a regional financial organization that had multiple branch offices, making it difficult to meet effectively with employees to encourage plan participation. As a result, the plan decided to add automatic enrollment. The plan’s salary deferral default was set at 2% and target date portfolios were chosen based on the participant’s date of birth as the default investment option. The result of this change was an increase in participation to 85%! This change is expected to have a positive impact on the year-end discrimination test results, while becoming a helpful start toward building a retirement account for over 230 new plan participants.
If you haven’t considered using the automatic
enrollment option with your plan, discuss with your retirement advisor whether or not it would be an appropriate
feature for you to add. Remember, increased participation rates benefit everyone!