The Auto-Features Advantage for Plan Participants and Sponsors
Workplace retirement plans play a major role in helping Americans reach their retirement goals. Access to a retirement plan, though, is really just a starting point. The next step is nudging employees to save, save, and save some more, particularly employees who may have scaled back how much they were saving due to the economic squeeze caused by the pandemic. Fortunately, retirement plan automatic features are an effective way to boost savings for plan participants—and there are real advantages for your plan sponsor clients as well.
Automatic Enrollment Growing
Auto enrollment is rising in popularity, and it’s easy to understand why. It allows eligible employees to automatically contribute to the retirement plan at a specific percentage of pay. Although there’s an opt-out feature, the good news is only 10 percent of employees choose not to enroll. Even better? After implementation of auto enrollment, the vast majority of plan participants (up to 85 percent) stay enrolled.
Advantages. Beyond those benefits, auto enrollment has pros for plan sponsors:
- Increased participation and higher contribution rates: These factors may favorably affect a sponsor’s nondiscrimination testing results, allowing owners and highly compensated employees to contribute more to their retirement savings plan.
- Streamlined and standardized onboarding process for new employees: By reducing paper-based workflows, employers can efficiently onboard new employees.
- Simplified selection of appropriate investments: This simplification often fulfills qualified default investment alternative (QDIA) objectives, providing safe harbor protections for plan fiduciaries.
- Encouragement for employees on the road to retirement: When employees can afford to retire, it’s good for them and the business’s financial resources. Encouraging employees to save also helps foster a culture of loyalty, morale, and productivity.
- Potential to qualify for a tax credit of up to $500 for three years: courtesy of a provision in the SECURE Act.
Automatic Deferral Escalation: Battling Inertia
Automatic deferral helps plan participants incrementally bump up their contribution rates until they meet a predetermined level. The minimum recommended ceiling is 10 percent. Plan sponsors can set the percentage by which a participant’s elective deferral will increase each year (1 percent is most common) until it reaches a predetermined ceiling.
Advantages. Auto-deferral escalation combats retirement savers’ inertia. According to T. Rowe Price, participants presented with an opt out for auto-deferral escalation adopted at a rate of 65 percent, compared with an adoption rate of 12 percent for those presented with a choice to opt in. Plus, increasing deferral percentages encourages participants to realize the full extent of their employer-matching contribution possibilities—no more leaving free money on the table!
Reenrollment: Providing a Do-Over Opportunity
The reenrollment option gives employees the chance to modify existing 401(k) investment choices into the plan’s QDIA (typically a target-date fund). Participants receive a notification that their existing assets and future contributions will be directed to the QDIA on a specified date, unless they opt out. For participants who aren’t confident in choosing investments or lack the time to manage them, reenrollment is a great way to reset and ensure that they’re repositioned to meet their retirement goals.
Advantages. When implemented correctly, reenrollment allows plan sponsors to strengthen their fiduciary standing by gaining favorable QDIA safe harbor protections.
Might your 401(k) plan need an auto enrollment feature? Does your plan have:
- Low or declining participation rates, counting eligible versus participating employees with an account balance
- Low or declining savings rates (the average participant savings rate is 7 percent, according to Vanguard research)
- Low average account balances (the average balance is $106,478, according to Vanguard research)
- Plans recently needing to make corrective distributions due to nondiscrimination testing failure (As a result of this failure, highly compensated employees have a portion of their elective deferrals returned.)
- Companies with multiple locations, which typically have enrollment and engagement challenges
- Lack of QDIA or target-date funds in the plan offering
If you are interested in finding out more, call NorthStar Financial Partners, LLC at (507) 281-6650 and ask for a 401(k) specialist to help!
Dan Collins, (2021), The Auto-Features Advantage for Plan Participants and Sponsors, Commonwealth Business Review EZine Edition.
NorthStar Financial Partners is located at 959 34th Ave NW, Rochester, MN 55901 and can be reached at 507-281-6650. Securities & Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. Fixed insurance and services through NorthStar Financial Partners.