Sunday, May 20, 2007

Starting Blocks

There’s little question that automatic enrollment “works,” at least in terms of turning employees into participants—just as there is little doubt that, left to their own devices, too many employees remain on the retirement-savings sidelines.

However, as I talk to advisers, third-party administrators, and plan sponsors around the country, I’m increasingly aware that the Pension Protection Act’s automatic enrollment safe harbor is more unpalatable than one might have imagined on first blush. Sure, automatic enrollment is an effective way to get people into the plan—but that 50% matching requirement on an escalated contribution (Congress apparently thought that a 50% match up to 6% of pay deferral was “normal,” rather than merely common among larger plans), particularly on participation levels escalated by automatic enrollment, is simply too expensive for many. And many, already taking advantage of the current safe harbor designs, simply don’t need the discrimination testing shield that the PPA’s version offers as a carrot to offset the match’s “stick.”

As that realization sinks in, I am increasingly asked about other ways to turn more workers into participants. Here’s a quick list:

(1) Start Sooner. The typical plan still makes people wait to join, generally as a matter of administrative practicality—Why go through the paperwork of setting someone up who is going to leave in three weeks, after all? Still, I wonder how many people we lose to the “take the package home, discuss it with your spouse, and turn it in 90 days hence” message that is part-and-parcel of today’s enrollment mentality.

(2) Start Simpler. A growing number of providers now make available something they call “ez-enrollment,” or something to that effect. Workers only have to pick a deferral amount in some cases, while others ask them to pick a deferral amount and perhaps one target-date fund.

(3) Return “Engagement.” Even if there are good reasons for making people wait to join, there’s no reason to let them off the hook. Certainly, these are voluntary programs, but there’s no reason you can’t make workers return the enrollment form, even if it is just to say “thanks, but I’m not interested in participating now.” You can make them turn the forms in at the same time all the other employment-related forms are turned in (even if you don’t start withholding contributions for a period of time), or you can simply build a reminder system of some sort to ensure that they turn the forms in. You might be surprised how many, forced to do so, actually become participants (see also Participant Directives - I

(4) Meetings Matter. Admittedly, mandatory enrollment/education meetings bring with them certain “complications”—but it’s hard to persuade the unconvinced to join the plan if you only preach to the choir (the ones who come voluntarily are generally already committed to the process).

(5) Management Matters. Make sure that the boss is in the room for the enrollment meeting, and give them a speaking role. First, if the boss is there, voluntary meetings quickly become mandatory (see above). Second, if the person who signs their paychecks tells them how important this is, that message is almost certainly more impactful than the perspective of an “outsider” (see also Meeting Minders).

(6) Make Missionaries. One of the most effective encouragements to workplace savings is the workplace leaders. These can be supervisors, of course, but sometimes the hierarchies are less formal than that. These are the folks that everybody else listens to—respected individuals in the workplace who, once they are committed to the program, can talk up the plan, the benefits, etc. during the regular work day on the shop floor—long after you’ve packed up the presentation and gone home. These folks can (and do) preach the gospel of savings—and those who don’t save feel pretty stupid for not doing it. An additional benefit? They can help reach across barriers of language, race, etc. They literally speak the language.

Finally, it may be worth reminding employers who have a problem with the “strings” attached to the safe harbor automatic enrollment design that they can still do automatic enrollment outside of the PPA’s auspices. They’ll miss out on some of the PPA’s protections, of course, but, ultimately, they’ll likely get what they most care about—better participation rates.

- Nevin Adams

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