Why Doesn’t Every Plan Have Automatic Enrollment?

For all the good press and positive results that automatic enrollment gets, one might well expect that every plan would embrace it. And yet today, nearly a decade after the passage of the Pension Protection Act, many still don’t.

So, why don’t all plans use automatic enrollment — and what can you do about it? Here are the primary objections that I have heard from plan sponsors — and some possible responses.

Cost.

The simple reality is that automatic enrollment “works,” which is to say that overnight, it has the very real potential of transforming a long-standing plan participation rate of 67% or 75% to 95% or greater.

The other simple reality is that when you take that likely increase in participation rate (generally from 70% to 95% or so), and then figure out the increase in matching dollars that would result — well, it can be a sudden budget jolt, particularly when you think about it applying to an employee population that is likely more tenured and highly compensated.

Personally, I’ve never seen much response to the threat that plan sponsors who aren’t attentive to the outcomes of the plans they provide will find themselves accounting for that decision in a court of law (remember when they were all going to get sued for not offering advice?). Nor have I seen the cost possibilities of adopting a stretch match offset the PR realities of imposing it.

For years, employers have struggled with the rising (and often annually rising) costs of benefits like health care. A number of larger employers have embraced the so-called “de-risking” of their pension obligations, in many cases trading the uncertain future obligations on their bottom line of their defined benefit pension in favor of a defined contribution alternative. But that has also had the effect of transferring a greater uncertainty about retirement to their workers.

RESPONSE: Today there is plenty of evidence to suggest that workers are increasingly concerned about retirement finances, and that those concerns are not only cutting into their productivity at work, but that, in a growing number of situations, their solution to those concerns (real or imagined) is simply to extend their working careers. And a growing number of CFOs recognize that those costs are real and growing — and can be mitigated by better retirement preparations by their workforce.

Some (still) view it as too paternalistic.

Like it or not, at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach.

Indeed, inklings of this can be seen in the varied industry surveys that continue to find that, even when plans adopt automatic enrollment, they tend — by a margin of 2:1 — to apply it only to new hires, rather than to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to. Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above.

While plan sponsors are understandably reluctant to rouse those “sleeping dogs,” it’s hard to imagine that they aren’t just as concerned about their retirement well being as those recent hires. Moreover, while the PPA doesn’t mandate going back to older workers, plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have.

RESPONSE: The ultimate solution, of course, lies in understanding that the reasons some newly eligible workers chose not to participate — or more likely made no choice at all — are the same reasons the not-so-newly eligible are still on the sidelines. For employers — particularly those who have already embraced the design on behalf of their new hires — the question remains: Shouldn’t you be just as invested in the retirement security of those who have made a longer-term commitment to you?

Safe harbor plans already have it covered.

Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination and top-heavy tests have since found the solace required in adopting a safe harbor design.

RESPONSE: Maybe nothing. If a safe harbor plan is already in place, well arguably, that’s just a different kind of automatic enrollment, though it doesn’t tend to show up in the adoption statistics.

Some fear it will reduce deferrals.

More accurately, it may reduce average deferrals. Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (at least until design features like automatic contribution acceleration kick in). Put another way, participation rates go up, and average deferral rates dip — at least initially. That might mean that some individuals do, in fact, save less by default than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default. This is a line of thinking that gets picked up every so often by the financial press, generally by some writer looking to find a contrarian angle on automatic enrollment. And sure enough, the conclusion seems so striking that many seem to feel compelled to share those articles, rather than simply dismissing it as ill informed, if not uninformed.

RESPONSE. Remind them that those articles ignore the reality — borne out by the data — that many workers, and generally younger, less tenured workers, will be saving more because that initial savings choice was automatic. Those most likely to be short-changed by automatic enrollment are higher income individuals — who arguably ought to know better.

Concerns about administrative issues.

Even in this age of automation, it can be complicated to unwind payroll elections, and while the PPA outlined a series of provisions to make it easier to give workers the ability to opt out (an extended grandfathering period for them, and the ability for their employer to temporarily invest those monies in vehicles that wouldn’t lose value during that temporary period), it can still be a tedious, painful process (depending on whom you rely on for payroll and recordkeeping services).

RESPONSE. Sure it can be a hassle if it should come up — and we’re talking about somebody’s paycheck. On the other hand, so few opt out, the hassle might be more illusion than reality.

Some employers — especially smaller ones — know why employees aren’t contributing.

When you look at the survey data on automatic enrollment adoption, there is a wide gap between the largest employers (where automatic enrollment is relatively common) and the smallest employers. Of course, most industry surveys do a better job of capturing the activity among the former (those being the clients of the providers who produce those surveys) than the latter, so it’s easy to think that automatic enrollment is more prevalent than it actually is.

However, when you talk with smaller employers about the concept, it’s not unusual to encounter a very personalized resistance, because they: (a) have likely approached their workers individually on the topic; and/or (b) have heard directly the reason(s) why they are not participating. To them automatic enrollment is a particularly harsh approach, since it basically requires that they ignore or discount the reason(s) they have already been given.

RESPONSE: First, it’s worth confirming that they have, in fact, actually made those inquiries directly. Second, see how long it has been since that conversation. Circumstances change, after all — and that trusted worker who told them several years back why they couldn’t contribute, may now be embarrassed to change course. Finally, of course, automatic enrollment, particularly with the help of today’s default investments, makes it a lot easier to start saving — right.

What's Next?

The reality is that automatic enrollment won’t be appealing to every plan sponsor’s benefits philosophy or budget. But unless your plan participation rate is in the upper 90% range, the reality is that whatever you are doing to encourage participation isn’t as effective as automatic enrollment could be. And once you get people in the plan, just think what else you could be helping them with…

- Nevin E. Adams, JD

15 (More) Retirement Plan Points to Ponder

Working with retirement plans is a complicated, challenging and constantly changing process. That said, there are certain constants — and things that bear repeating and/or reconsidering from time to time.

Since I published my first list of 15 last fall (one of my most popular, as it turns out), I’ve gotten several very good suggestions — and had an epiphany or two.

Here are a few (more) points to ponder:

1. Cheaper isn’t always better, unless it’s the only difference.
2. Sometimes you do get what you pay for — but not always.
3. If you’re not doing anything “wrong,” you probably aren’t doing anything much.
4. You can spend a lot of money in court being right.
5. A fund whose allocation is based solely on date of retirement is sure to miss something, but not as much as a fund whose allocation doesn’t take that into account.
   
6. If you don’t know how much you’re paying, you’re likely paying too much.
7. Don’t assume that those who aren’t saving via your workplace retirement plan know what they are doing — or what they are missing.
8. There’s something about putting decisions down on paper that helps people take them more seriously.
9. Figuring out how much to take out is harder than figuring how much to put in.
10. The werewolves always outnumber the silver bullets.
11. When it comes to workplace retirement plans, there are three kinds of people: those who are ERISA fiduciaries and know it, those who aren’t ERISA fiduciaries and know it, and those who are ERISA fiduciaries and find out via subpoena.
12. If you can’t remember the last time you did a request for proposal, it’s probably overdue.
13. The default deferral rate for a non-automatic enrollment plan… is zero.
14. If you don’t know why “we’ve always done it this way,” it’s time you did.
15. You may not know all the right answers, but it’s worth knowing the right questions.

- Nevin E. Adams, JD

4 Things That Make Me Go ‘Huh?’

Ours is a business where surveys and trends often shape not only perceptions, but policy — though sometimes the conclusions drawn, and even the premise itself — make me go “huh?”

Here’s a sampling:

Citing a drop in deferral rates as a failure of automatic enrollment.

Every so often a personal finance writer will stumble across an industry survey that shows that the average deferral rate in 401(k) plans has declined, a problem they attribute to automatic enrollment adoption. We all know what is going on here; individuals who take the time to fill out a form and enroll in the plan manually tend to defer at a higher rate than do those who are automatically enrolled, the latter typically at a modest 3% rate. On the other hand, automatic enrollment has a dramatic impact on raising the participation rate. The rest is just math — more people, saving at lower rates = a lower average deferral rate.

Now, those individuals automatically enrolled at a 3% rate may draw down the average deferral rate of a plan, or the industry, but it’s almost certainly true that most people who are now saving 3% without automatic enrollment would likely have been saving — nothing at all.

Equating retirement confidence with retirement readiness.

Seems as though every other month we get yet another take on how Americans feel about their retirement prospects — and it’s never very reassuring. The Retirement Confidence Survey conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates has been chronicling that sentiment for a quarter century and over that span of time has tracked movements in confidence that mostly seem to mirror the markets, rather than any real cognizance of retirement preparations. Indeed, the RCS has routinely found that fewer than half of the survey respondents have made even a single attempt — including guessing — to ascertain their retirement needs.

It’s not that confidence about one’s retirement prospects isn’t a relevant consideration — but we shouldn’t equate an uninformed sense of that status with reality.

Comparisons of DB versus DC investment returns.

If ever there was an apples-and-oranges undertaking, it’s the comparison of defined benefit and defined contribution plan returns. The former is, of course, the return of a portfolio representing a single overriding investment philosophy designed to achieve a specific aggregate objective, and one overseen by a plan fiduciary (or plan fiduciary committee). The latter is little more than an aggregation of individually managed (or more frequently unmanaged) portfolios.

And yet, every so often someone wants to offer a comparison of the returns between the two as some kind of evaluation as to which is “better.”

In many of these comparisons, defined benefit portfolios have fared “better,” and the underlying explanation (implicit or explicit) for that differential has tended to be diversification (or “better” diversification), and in more recent years, lower fees have been credited. What we’re apparently supposed to draw from that is that DB plans are better-managed in terms of asset allocation by professionals, better able to negotiate lower fees than their DC counterparts, and generally provide a better return on investment. In other words, DB plans are “better.”

Now, I’m not saying that all, or even most, of those individually directed DC plan allocations are as well designed or maintained as those put in place by a DB investment committee, and however well negotiated it is, it’s hard to imagine that a DC plan with all its inherent complexities could (or should) get as good a deal on price as a DB offering. In fact, unless your defined benefit plan has a single participant, those programs have completely different objectives and timeframes.

You might as well be comparing a sports car to a Hummer; which is “better” depends on the distance, the terrain, the length of time you have to complete the journey, how much fuel you have — and how many people you have to transport.

Using average 401(k) balances as a proxy for retirement security.

If there is one number I wish our industry would quit publishing, it’s the average 401(k) balance. Here you have participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. Frequently it is based only on the accumulations that have occurred during their tenure at an individual employer, and often only the balance that is found on the single recordkeeping system that is publishing the result. But in preparing this number, those widely varied circumstances are all slopped together to create — mush.

Worse than mush, actually. Because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income, a point that is reiterated somewhat incessantly (and generally without the caveats about what it is an average of) in the press.

I’ll allow that some of the permutations of this calculation — such as when we see that average broken down by age demographic — can be instructive as to longer-term trends, but an average 401(k) balance is akin to an average reviewer rating on Amazon.com.

As with everything else on my “huh?” list, it’s mathematically accurate — and nearly completely useless.

- Nevin E. Adams, JD

Are the Panthers a Portfolio Pick?

Will your portfolio pick up with the Panthers, or will it get bucked by the Broncos?

That’s what adherents of the so-called Super Bowl Theory would likely predict. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time — for 39 of the 49 Super Bowls, in fact.

It certainly proved to be the case this past year, following Super Bowl XLIX, when the New England Patriots bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the Denver Broncos, a legacy AFL team, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens — who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — the Ravens and the San Francisco 49ers — were NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on — and took down — one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers — two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

There was the string of Super Bowls where the contests were all between legacy NFL teams:

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals; and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.

The markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work.”

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down that year. However, the S&P 500 climbed 2.55%. Of course, Super Bowl Theory proponents would tell you that the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that nobody remembers because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction”) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams and the Baltimore Ravens did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.¹ And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance — and lost — the S&P 500 gained nearly 16%.

As for Sunday’s contest, the “line” has been a bit volatile, though the Panthers seem to be hanging in as 6-point favorites. For the third year in a row, the Super Bowl will feature the two No. 1 seeds in the big game – and, perhaps not surprisingly as a result, four of the last five Super Bowls have come down to the last play.

Jersey ‘Sure’?

The Broncos are 0-4 all-time wearing their orange jerseys in the Super Bowl — but they’ll be wearing white this Sunday. The Panthers might be glad to be in their dark jerseys — they were wearing white in their single Super Bowl appearance, a loss. On the other hand, believe it or not, 10 of the last 11 Super Bowl winners were wearing white jerseys, according to CBS Sports.

All in all, it looks like it will be a good game. And that — whether you are a proponent of the Super Bowl Theory or not — would be one in which regardless of which team wins, we all do!

Nevin E. Adams, JD

1. In fact, Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.