Why Auto-Enrollment is Always a Good Idea
Auto-enrollment has seen increasing adoption among plan sponsors of retirement plans. And for good reason: It is hard to find a reason why auto-enrollment is a bad idea!
Yet, there have been some concerns. Some plan sponsors worry about the disruption auto-enrollment may cause employees. Since employees can opt out, there has been little revolt against the concept; and many entities having now successfully implemented auto-enrollment.
A second concern is the increased match costs for employers that would have to provide a matching contribution to auto-enrolled employees. This cost can be mitigated by the potential cost of delayed retirement for the employees who do not have enough money to retire because, well, they were not auto-enrolled. And, of course, costs can be eased by modifying the plan’s matching formula; perhaps by introducing a “stretch match” concept where an employee is encouraged to defer more, in order to receive the maximum match.
And, finally, for state and public entities such as public higher education institutions, auto-enrollment is sometimes viewed as overkill, since many employees are already required to make their own contributions to their retirement plan. However, an increasing number of states have adopted auto-enrollment for their 457(b)/403(b) plans, in addition to those mandatory employee contributions. And, a recent survey indicated that nearly half of state and local governmental employees approved of the concept. Thus, it appears that concerns over auto-enrollment can be easily rebuked.
As for those plans that already have auto-enrollment in place, it is worth considering “turbocharging” the program. For example, if the default deferral rate is still at 3%, consider changing it to at least 5%. While employees can still opt out, studies have shown that opt-out rates do not significantly increase at higher default rates. In fact, an argument can be made for making the default rate as high as possible. Pairing auto-enrollment with auto-escalation, where the deferral rate automatically increases every year, is a no-brainer. Additionally, if the plan is only utilizing auto-enrollment for new hires, consider extending it to existing employees as well.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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