Benefits of automatic enrollment in a retirement plan
Artificial intelligence may be all the rage in this day and age, with multiple reports coming out on a seemingly daily basis highlighting the benefits of AI on both professional and personal levels. But before we had artificial intelligence, we had automation.
Automation has improved (and has continued to improve) our world in multiple ways. Think about it—automation crept into our lives in a subliminal manner but has since come to play a pretty big role in our lives, whether we realize it or not. Automatic doors open for us when we’re ready to enter or exit a building, regardless of how full our hands are. Automatic walkways ease some of the stress we feel when trying to make our gate on time in a crowded airport. Google uses automation to finish our sentences and help us find what we’re looking for before we’ve even typed out an entire search term. And automatic reminders for things like oil changes and doctor appointments simplify our chaotic schedules and keep us on track with our day-to-day responsibilities.
Wouldn’t it be nice if there was a tool that could do the same thing when it comes to safeguarding our financial future? Simplify the savings process to better keep us on track to reach our long-term goals?
Well, implementing automatic enrollment for your company’s 401(k) or similar retirement plan can do just that for you and your employees.
Reasons to utilize automatic enrollment with your company’s retirement plan
Automatic enrollment essentially works just as you would imagine it would—your employees (when eligible) are enrolled automatically in your employer-sponsored retirement plan unless they proactively choose to opt out. There are many benefits of implementing such a program, which is probably why nearly half of all 401(k) plans now utilize auto enrollment . The feature continues to get more and more popular, too; in fact, the adoption of automatic enrollment in retirement plans has grown by a whopping 300 percent over the last 15 years and tripled since 2007 alone .
401(k) auto enrollment pros and cons
Although the key benefits of implementing automatic enrollment in a 401(k) plan mainly surround the participant, there are certain advantages for the employer as well.
Automatic enrollment benefits for the business:
· Helps attract and retain valued employees
It’s no secret that high-value employees and qualified prospects alike expect to be offered some type of retirement savings vehicle in their benefits package. A huge percentage of workers (88 percent to be exact) say that a 401(k) is a must-have benefit, while another 90 percent admit they would think twice about taking a job that didn’t offer a 401(k) .
Take it one step further by offering a 401(k) with auto enrollment to show your current employees and prospective employees that you truly care about helping them prepare for their financial future and reach their retirement goals.
· Improves non-discrimination testing results
Things are about to get a little technical, so hang in there.
Unless the plan meets certain contribution requirements to be a “Safe Harbor” plan, 401(k)’s are required to undergo yearly testing to ensure they don’t discriminate in favor of business owners or employees with higher incomes. Non-discrimination tests require that highly compensated employees (HCEs) and key employees (like business owners or organization leaders) stay within a specific contribution rate, which is determined by the contribution rates among non-highly compensated employees (NHCEs). The tests are designed to even the playing field between lower income workers who struggle to save and HCEs who can afford to max out their retirement account each year.
So how exactly does automatic enrollment help with non-discrimination testing?
A disproportionate percentage of employees that aren’t participating in the plan are lower income or minorities, for starters, and evidence suggests that auto enrollment can increase participation rates among these groups dramatically—from 19 percent participation to 75 percent . And according to the Society for Human Resource Management, raising the participation rate among middle and lower income workers tends to help companies pass non-discrimination tests .
Why? When these groups aren’t participating in the plan, the average contribution rate among non-highly compensated employees is dragged down—which can have a direct effect on the contributions HCEs and key employees are allowed to make. High participation rates with adequate contribution levels can help balance assets from HCEs and NHCEs, improving the likelihood that a plan will pass top-heavy testing and other non-discrimination tests.
· It’s easy
Once the initial setup is complete, automatic enrollment becomes fairly hands-off for the employer. Eligible employees are automatically enrolled in the plan with a default contribution rate, which simplifies the enrollment process on the employer’s end and encourages steady saving habits among participants.
Plus, automatic enrollment is proven to increase participation rates in the plan. When automatic enrollment is utilized in retirement plans, 92 percent of employees participate in and contribute to the plan—compared to a lackluster 57 percent participation rate among plans with voluntary enrollment.
Clearly, there are benefits to adopting auto enrollment for your 401(k) plan. But that doesn’t mean there aren’t also some considerations you should take into account before deciding to do so.
Potential downsides of automatic enrollment:
· Declining contribution rates
We’ve covered in detail how auto enrollment can help increase the number of employees participating in a retirement plan, but employees participating in an auto enrolled plan tend to contribute less than those who proactively sign up for such a plan. This may be, in part, because employees who voluntarily sign up to save for retirement are probably more engaged and in-tune with their savings goals than those who are automatically put in the plan. But employers may also be partly to blame.
When employers implement a 401(k) plan with automatic enrollment, they choose a contribution level that automatically-enrolled employees default to, and oftentimes, the default rate is too low to adequately reach savings goals. And that’s not to say that picking a default contribution rate is easy or straightforward. Set it too high and people will opt out of the plan; set it too low and employees may not have a good shot at reaching their savings goals.
Do employees benefit from automatic enrollment in a 401(k)?
As we mentioned earlier, the main benefits of automatic enrollment (when it comes to retirement plans) surround the participant. Perhaps the biggest benefit of auto enrollment is that it gets employees saving, with more than 60 percent of all contributing participants in 2017 coming from plans with automatic enrollment features . And while studies show that automatic enrollment increases participation rates among all demographics, stats get even more impressive when looking at participation rates among minorities and lower income workers. In fact, participation rates double among individuals earning less than $30,000 per year when automatic enrollment is utilized.
Clearly, auto enrollment is beneficial—to all involved. Automatic enrollment takes indecisiveness and procrastination out of the picture, putting employees on the path to retirement readiness as soon as they are eligible to join the plan. Plus, when appropriate default investment selections are made, a 401(k) can be more effective at generating larger account balances, which can only help those enrolled in the long run . And since businesses also benefit from adopting automatic enrollment with their 401(k), it’s really a win-win all around.
To learn more about implementing an automatic enrollment 401(k) for your business, give us a call today: 800.236.7400, option 1.