It takes more
The passage of the Pension Protection Act of 2006 (PPA) ushered in a new era of automatic plan design features. Many plans—and many advisers—embraced the plan design, and it seemed poised to be the new normal.
However, while large and mega plans use automatic enrollment at levels of 61.7%
and 63.7%, respectively, just 41.1% of plans overall auto-enroll their employees,
according to the 2016 PLANSPONSOR Defined Contribution (DC) Survey. Further,
advisers, as well as the rest of the industry, have discovered that, although auto-enrollment has gone a long way toward convincing people otherwise uninterested
in joining the plan, to save, the feature is not the ultimate solution some had hoped
it would be. Most plans—the PLANSPONSOR survey indicates 45.0%—still default
participants at a paltry 3% deferral rate. That, coupled with the inertia that keeps
participants from adjusting their accounts—and a low take-up of automatic escalation by plan sponsors ( 17.5%)—keeps savings rates low.
Thus, forward-thinking advisers now recognize the need to actively engage with
their plan sponsor clients, have them show participants the importance of their
plan, which may mean talking to them about more than just retirement.
Auto-enrollment and -escalation “have created good outcomes, or at least better
outcomes,” says Ed Farrington, executive vice president and head of retirement at
Natixis Global Asset Management in Boston. “But there is some danger in thinking
they are the panacea. When we look at people who are automatically enrolled and
fast forward a few years, 67% of them never change their investment election, and
it is possible that not all of them were put into the right investment or deferral rate.”
Farrington says another issue is the transactional nature of the plans. Natixis
research found that 33% of people have tapped into their 401(k) “to use it as if it
were a checking account, either through a loan provision or by taking a lump-sum
withdrawal” when switching jobs.
Jeb Graham, retirement plan consultant and partner with CapTrust, Tampa,
Florida, says the conventional wisdom about plan design and participant education has continued to evolve. In the 1990s, advisers tried to educate participants
about investments, and, since 2000, the focus has moved to automatic features