implement this type of re-enrollment when they do a recordkeeper conversion or have corporate mergers/acquisitions,
says Aimee DeCamillo, head of retirement plan services for
the firm, in Baltimore.
Asked to cite a best practice for re-enrollment that
includes the deferral rate, Patterson says a 6% rate, with
1% auto-escalation, is emerging as a good number. “The
experience of our plan clients shows that if you auto-enroll
employees at 8% or above, you begin to see a meaningful
fall-off in the ‘stick rate,’” he says. “More employees say,
‘That seems like a lot.’”
The biggest argument for sponsors increasing the defer-
ral rate in a re-enrollment is simply because it works
to help participants save enough for retirement,
says Nathan Voris, managing director of busi-
ness strategy at Schwab Retirement Plan
Services in Richfield, Ohio. “You build in
these positive participant behaviors every
time you do a re-enrollment,” he says.
On the challenging side, a re-enroll-
ment that includes deferral rates could
increase an employer’s match costs signif-
icantly, if a plan has many very low-saving
participants. “It depends on the plan design,”
DeCamillo says. “You have to do an analysis
and look at, what are the incremental costs to the
employer? And what are the ways to offset those?”
A T. Rowe Price white paper, “Getting Beyond Ordi-
nary—Managing Plan Costs in Automatic Programs,”
discusses some of the ways an employer can offset the
potential cost increases accompanying automatic features.
These can include making changes to the employer contri-
bution’s structure, such as shifting to a stretch match or
moving the timing of the employer contribution to the
end of the year so employees who depart before that do
not get that year’s match. An employer also can control
its costs by changing the vesting design, such as requiring
longer service for 100% vesting. Additionally, by altering
a plan’s eligibility rules, the employer can limit the finan-
cial impact: Potential moves include changing eligibility
timing for new hires to let them enroll immediately but
get no employer contribution for one year.
Doing the Backsweep
When Schwab Retirement Plan Services’ plan clients
perform a re-enrollment, they typically include current
participants and nonparticipating eligible employees—and
both re-enroll them into the QDIA and increase deferrals for
those saving below the default deferral rate up to that rate.
“It gets more people closer to success,” says Voris. “And we
see very little, if any, participant backlash.”
Aon Hewitt’s biennial Trends and Experience in Defined
Contribution Plans Survey shows that the percentage of
employers doing a backsweep—re-enrolling eligible nonpar-
ticipants—has held steady in the past several years in the
14% to 16% range, says Rob Austin, director of retirement
research at Aon Hewitt in Charlotte, North Carolina. “About
half of those companies do it as a one-time sweep, and the
other half keep re-enrolling people every year,” he says.
Principal Financial Group strongly believes in plans
doing a backsweep of eligible employees every year, because
employees’ reasons for not saving often get eliminated over
time, Patterson says. “We did some participant research,
and it found that 80% of participants said they had a
neutral or positive reaction to plan sponsors re-enrolling
employees who had opted out of the plan,” he says. “They
said it didn’t upset them.” Likewise, Schwab finds the “stick
rate” of a backsweep usually runs in the 85% to 95% range
of employees, Voris says.
According to Abend, opt-out rates over the long
term for a backsweep follow an interesting
pattern. “We find that, when our clients use
a default deferral rate of 3% in a sweep, the
long-term opt-out rate is 10%,” she says. “If
a sponsor does a sweep at 6%, the long-term opt-out rate is 4%.” She attributes the
lower opt-out rate accompanying a higher-deferral re-enrollment to the tendency
of participants to get more enthusiastic
about saving for retirement once they start
accumulating a substantial account balance.
A higher initial deferral builds the balance
Among Principal’s plan clients, the average
participation rate runs 7% higher for plans that implement
a backsweep along with auto-enrollment of new employees,
versus only auto-enrolling new hires, Patterson says. “And
we see a 17% higher average deferral rate for plans that
implement a sweep,” he says.
Re-enrollments that include both low-deferring participants and nonparticipating employees substantially boost
the percentage on track to, when including Social Security,
replace at least 70% of their pre-retirement income, John
Hancock finds. Among its plan clients that do re-enrollment
that way, “There is a 10-percentage-point improvement, on
average, in the percentage of participants being ready for
retirement,” Abend says.
Pointing out these benefits to participants can dramatically lessen their resistance, Patterson says. —Judy Ward
• Re-enrollment is seen as the next step plan sponsors
are taking following their embracement of auto-escalation, but, to date, implementation is in the single digits.
• A re-enrollment can reallocate balances into the plan’s
QDIA, increase deferrals up to the default deferral rate,
sweep in employees who are not participating in the
plans—or combine one of these initiatives with another
or do all three.
• Some plan sponsors do a re-enrollment annually, while
others do it only every few years.