An Automatic 401(k) Perspective for Employers
Overview
Inside This Series
News reports and research studies continue to show that the average American worker will not have enough money to live comfortably in retirement.
- More than half of all workers reported less than $50,000 in total savings and investments excluding their home. (2005 Retirement Confidence Survey - Employee Benefit Research Institute & Mathew Greenwald & Associates)
- Nearly one-third (33%) of American employees work for employers who do not sponsor a retirement plan. (EBRI Issue Brief No. 289, January 2006)
- The biggest reason for the poor savings rate is that people have been borrowing against assets–mainly their homes–to get their hands on spending money. Last year, consumers pulled a mammoth $243 billion from their home equity. (Freddie Mac - USA Today, March 2006)
Multiple tactics to the point of scare tactics to get Americans to save are not necessarily accomplishing what they set out to do. Meanwhile, health costs along with household debt continue to rise.
Helping Fulfill Your Responsibilities
Defined contribution plans are replacing the traditional defined benefit plans, thereby placing the employee in the driver's seat without an instructional manual. It should be no surprise that many employees are not making the best use of your 401(k) plan. Too many decisions and the lack of time, information or money paralyze employees. Rather than take action, many employees do nothing. Other employees contribute too little or too late. On the bright side, some employers have taken over the wheel and discovered a temporary solution to this long-term problem.
Putting Your 401(k) on Autopilot
The simple approach is an "automatic" 401(k) account, sometimes called an autopilot plan. Employers are automatically enrolling employees in their 401(k) plan. This approach involves clearly communicating to employees how to opt out of the plan.
Automatic enrollment boosts participation including lower-income employees, who are the least likely to participate in 401(k) plans. Automatic enrollment of new hires can boost the rate of participation to 85%, according to Bo Harmon of the Retirement Security Project at the Brookings Institute. A major benefit to you as an employer is that automatic enrollment can help you to meet your discrimination testing (testing to ensure that low-paid workers take advantage of tax-deferred retirement savings plans and that the tax benefits of such plans do not accrue solely to the highly paid.)
Some employers have even taken a step further to automate other features of their 401(k) plans including auto deferral increases, auto investment defaults other than a conservative fund and rebalancing.
Ensuring the Right Fit
Automatic 401(k) plans may not be appropriate for every employer if you have:
- High 401(k) participation levels already. If a large percentage of employees are contributing to the plan, automating your 401(k) may not be necessary.
- Defined Benefit Plans
- High Turnover. It can be a hassle to handle many small accounts when workers leave
What are the Concerns?
Some employers are reluctant to implement automatic 401(k)s due to:
- Fiduciary concerns - fear of litigation
- State Garnishment Laws - laws that require employers to receive written notice from workers before wages are taken out of their paychecks.
- Increased costs - match
- High employee turnover
Addressing employer concerns
The House and Senate are close to approving legislation that should address the first two concerns. The legislation:
- Encourages employers to automatically enroll their workers in 401(k) plans. It gives employers who automatically enroll workers in a 401(k) plan some protection from lawsuits if the investment options chosen are "reasonable."
- Enables employers to offer balanced investment options with a little more risk but with returns that allow people to earn enough for retirement. (Keeping in mind that historical returns are no guarantee of future returns)
- Preempts any state garnishment laws when it comes to auto enrollment.
- Provides provisions for a safe harbor design that will meet employer non-discrimination and top-heavy tests.
Taking the first step
You are in the best position to maximize value for your employees through the retirement plans that you offer or contemplate offering. The first step could be as easy as setting up 401(k) automatic enrollment. No doubt, there is investment risks involved for the decisions that you are going to make for your employees. It may be worthwhile to take the initiative now to help achieve a more secure retirement for your employees in the future. Your efforts can reward you with a happier workforce that is more prepared for retirement.
