What’s Wrong with Automatic Enrollment?

Automatic enrollment has long been touted – and proven – to be an effective way to overcome retirement savings inertia in 401(k) plans. But these days automatic enrollment plan design seems to be suffering from its own inertia.

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. What’s wrong with automatic enrollment?

Everybody doesn’t do it.

Only the most naïve industry professional ever assumed that the Pension Protection Act of 2006, even with all its incentives and encouragement (and not a few barrier removals) would transform a voluntary savings system into something that all employers everywhere would feel comfortable – or would be able to afford – automatically enrolling every eligible worker.

And yet, more than a decade later, only about two-thirds of the largest employers have embraced automatic enrollment – and only about a quarter of the smallest programs, according to PLANSPONSOR’s 2017 DC survey. Oh, you see numbers that suggest the adoption rate is higher, but those surveys tend to skewer toward larger programs, where – as the numbers above indicate – automatic enrollment is much more common.

There are legitimate concerns, mind you. Anecdotally many plan sponsors – particularly small plan sponsors – are simply unwilling to impose another financial “draw” on their workers’ paychecks, and most will tell you that they have had those “you need to participate” conversations with their workers, only to have them decline. Moreover, the costs of an employer match when you’re talking about taking participation from a 70% (or thereabouts) level to 95% or higher can be significant.

For those who worry that a higher default would trigger a higher rate of opt-outs, surveys indicate that the “stick” rate with a 6% default is largely identical to 3%.

On the workforce management front, it’s worth noting that there are surveys that show that American workers are increasingly delaying retirement (or think they will be able to) due to concerns about retirement finances. Delayed retirements may also reduce the employer’s ability to hire new employees, reducing the flow of new ideas and talent into the organization.

But even when the plan includes automatic enrollment…

There’s a fault with the default.

While you see surveys suggesting that a greater variety of default contribution rates is emerging, the most common rate today – as it was prior to the PPA – is 3%. There is some interesting history on how that 3% rate originally came to be, but the reality today is that it has been chosen because it is seen as a rate that is small enough that participants won’t be willing to go in and opt-out – and, after the PPA, we have some law to sanction that as a target.

That said, nobody thinks 3% will be “enough” – neither to maximize the employer match in most plans, nor certainly to allow workers to accumulate sufficient funds for retirement. That wouldn’t be so bad – it’s a starting point, after all – except that…

The contribution rate is set – and never “reset.”

The authors of PPA’s automatic enrollment safe harbor knew that the 3% default wouldn’t be “enough,” and they had the wisdom to include a provision that called for an automatic “escalation” of that contribution rate – 1% a year (though, weirdly, they included a cap of 10% in the law). Plan sponsors – for many of the reasons that have slowed the adoption of automatic enrollment – have been even slower to embrace automatic escalation. The PLANSPONSOR DC Survey found that only about a third (35.7%) of the largest plan sponsors automatically escalate contributions unless the participant opts out (about the same amount allow the participants to choose to automatically escalate). However, once again smaller plan sponsors are significantly less likely to embrace this plan design.

But even then…

Only the newly hired are automatically enrolled.

For years now, the standard – even among employers who embrace automatic enrollment – is to extend it only to new hires – we’re talking only about a third of plans extend this to other than new hires. The rationale is that existing workers have had their opportunity – and in all likelihood many opportunities – to participate in the plan. 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.

Regardless of safe harbor concerns, it’s hard to imagine that plan sponsors who have cared enough to embrace automatic enrollment aren’t just as concerned about the retirement well-being of their more tenured workforce as they are about those recent hires.

However, even among the newly hired, some may have previously participated in another plan – and at a higher contribution rate. Automatically enrolling them certainly removes one of those “first day” new employee hassles – but may not be doing them any favors in terms of their retirement savings.
As with the default contribution rate, surveys have found positive movement on this front in recent years, particularly at the point of provider conversions (amongst a series of other plan changes).
Indeed, a small, but growing number of plans are…

Giving workers a second chance.

There’s a new-ish concept called reenrollment. Initially, it was a means by which plans could, at the point of conversion to a new platform, “reenroll” participants into a newly selected default investment fund, generally a balanced or target-date fund that had been chosen as the plan’s qualified default investment alternative, or QDIA (they were generally given time to opt-out of that decision before conversion). More recently, it has been expanded to basically treat all eligible non-participants as new hires – auto-enrolling them in the plan, and in some cases, reenrolling at the default rate if they happened to be contributing below that rate.

That said, this approach is not only new-ish, but not very common. Even among the largest plans (more than $1 billion in assets) responding to the PLANSPONSOR DC Survey, more than 86% don’t do any part of this.

There are, of course, good things with automatic enrollment, mostly that there are today many participants saving at 3% (and a match) who weren’t saving anything previously.

So, what’s wrong with automatic enrollment? Well, there are some participants who were auto-enrolled at 3% who would probably have enrolled at a higher rate, and some who change employers and are being auto-enrolled at a “start over” rate. In most cases the default contribution rate isn’t changed (by the employer, and certainly not by the participant), and auto-enrollment is still (mostly) limited to new hires.

What’s wrong with automatic enrollment? Nothing, once we remember that it’s (only) an effective starting point – and one that, like most good decisions, requires some follow-up.

- Nevin E. Adams, JD

See also, 3 Things You Should Know About Automatic Enrollment. And for some caveats on automatic enrollment, see Why the ‘Ideal’ Plan Isn’t.

Different Mindsets

Last week Beloit College released the Beloit College Mindset List, as it has each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.”

For example, this year’s freshman class, born in 1994, have never known a time when history didn’t have its own channel, when there were tan M&Ms (or when there weren’t blue ones), or when “It’s A Wonderful Life” was shown more than twice during the holidays. They grew up talking about “who shot Mr. Burns?” not “Who Shot J.R.?” and while for them there’s always been an NFL franchise in Jacksonville, they’ve never known one in Los Angeles. That floppy disk icon for “save” in the word processing document is as anachronistic to them as the “CC” reference to “carbon copy” likely was to their parents’ email. And, perhaps most significantly, they have never lived in a world without the World Wide Web.¹

Despite those differences, the class of 2016 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and—eventually—how and how fast to draw down those savings.

Those fortunate enough to have access to a work place retirement savings plan at least stand to have some advantages their parents didn’t. They’ll have a better shot at joining those programs immediately, rather than waiting a year, as was once the norm. There’s a growing chance that they will be enrolled in those plans automatically,¹and with the option to increase that initial contribution automatically as well. The expanding availability of qualified default investment alternatives, like target-date funds, should make their investment choices easier and better diversified, and some will likely benefit from the counsel of a growing number of expert advisors. As for help in figuring out how best to draw down those savings in retirement, more choices and alternatives come to market every year.

However, they also have another big advantage (and one that helps make all those other advantages all the better): They’ll have the advantage of time, a full career to save and build, to save at better rates, to invest more efficiently and effectively.

It’s more than just a shift in mindset—and it could give retirement saving a whole new perspective.

- Nevin E. Adams, JD

¹ The full 2016 Mindset List (and links to prior years’ lists) is online here.

² EBRI has recently quantified the impact of eligibility for participation in a 401(k) plan on retirement readiness for Gen Xers. See this report online here. See also “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here.

“Checking” Accounts

I finally got to the dentist last week.

Don’t get me wrong, I like my dentist. The folks there are more than nice, they treat you like an adult (even when you clearly haven’t flossed since your last visit), and they outline options in a way that feels like you actually have a choice (including my personal favorite, “If it’s not bothering you, do nothing”).

That said, it had been a ridiculously long time since I had been there. Honestly, I knew it had been a while, but when my dentist pulled out his (detailed) record of my last visit—well, let’s just say I couldn’t believe it had been that long. In fact, I think if I had known how long it had been before I went, I might well have postponed it again, if only to spare myself the embarrassment.

Fortunately, despite my extended hiatus, things were in pretty good shape. Sure, the cleaning was more painful than it might have been, but overall, things were better than I had a right to expect.

After the market tumult of the past several weeks, I’m sure there are a lot of plan participants who are nervous about the state of their retirement savings accounts, and perhaps rightly so. I’m betting that, for most, it’s been longer than they think since they checked those accounts—and despite the recent headlines, those accounts may be in better shape than they expect.

The mantra in such times is, inevitably, “stay the course”—wise counsel in most situations, particularly since the impulse in such times is often action that one comes to regret in the fullness of time. However, for some, just sitting still and “taking” what the markets choose to inflict on your retirement savings can be excruciating.

To Do List

Here are some things participants can do while waiting for things to turn around—things they may have been putting off:

Get started on rebalancing by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren't realizing those as-yet-unrealized losses.

Increase current deferral rates. When you think about just how much cheaper those retirement plan investments are now, it's hard to pass up that kind of bargain. More so if you aren't yet saving at the maximum level of the match.

Consider automated rebalancing. Most providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with investment elections. It's a good way to keep things in balance without having to worry (or remember) about the best time to do so.

—Nevin E. Adams, JD

“Different” Strokes

Having been born in the Midwest, lived a quarter of my life in the South, and now another sixth in the Northeast, I can tell you—people are different. However, having worked for huge firms and considerably smaller ones, I can also tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be).

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes. Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective, IMHO. Plan fiduciaries frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources. Moreover, providers frequently introduce innovations with price tags that initially discourage smaller-program adoption (at least until later iterations are included as part of the “package”).

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

"Less" Likely

Consider that smaller programs—let’s use $5 million in assets and less (though some would carve even that in half)—are significantly less likely to have adopted automatic enrollment than those with more than $200 million; in PLANSPONSOR’s DC survey, only about one in five small plans had done so, compared with more than half of larger plans. Now, a goodly number of those smaller plans already had safe harbor designs in place, so had no “need” of automatic enrollment. In fact, one could argue that the safe harbor design is a kind of automatic enrollment. Smaller programs were also much less likely to have a contribution acceleration design in place (just 8.7% compared with about a third of larger programs).

PLANSPONSOR’s Annual DC Survey, which captures the perspectives of some 6,000 plans, found that smaller programs were more likely to make participants wait to vest in employer contributions, and only half as likely to have embraced immediate vesting—differences that admittedly might be predicated on economic considerations.

Only about half of smaller programs had an investment policy statement (IPS) in place, compared with nearly nine of 10 among larger programs. Perhaps not surprisingly, smaller plans reviewed their plan investments much less frequently (49% said annually, the most common response, while more than half of larger plans did so quarterly). They were also less likely to review fees regularly—and much more likely to “never” review them (one in 10).

Consider also that smaller programs were less likely to have adopted a target-date (TDF) solution as a default (28.6% versus roughly two-thirds among larger plans); though, even among smaller programs, target-dates were the predominant default fund choice. They were, however, more likely to be unsure that TDFs were the “best” QDIA option (44%), and more likely to doubt that their recordkeeper was offering the “most appropriate” TDF option.

"More" So

Investment performance was significantly more important to smaller plans, and fee transparency was also noticeably, if modestly, so. Things like financial strength, market image/reputation, and recognizable “brand name” funds stood out in their ranking of preferred provider attributes. However, when it came to things like participant service, reasonable fees, and provider Web site, there was no apparent difference at all.

Smaller programs were more likely to offer advice, and MUCH more likely to offer advice via an adviser outside the plan. Smaller plan sponsors were significantly more focused on the quality of advice to plan participants than larger programs, more worried about the reasonableness of fees, and placed less emphasis on adviser independence but greater emphasis on the ability to negotiate on behalf of the plan than did larger programs.

Of course, the service criteria are expressed in relative, not absolute, terms. That certain aspects were more important to smaller plans does not mean that others were unimportant. However, for those who work with and/or focus on smaller programs, those differences can be significant.

After all, we may all be alike—but that doesn’t mean we’re all the same.

—Nevin E. Adams, JD

The Ant And The Grasshopper

One of the more well-known Aesop’s Fables is the story of “The Ant and the Grasshopper.” In the story, the ant works hard all summer long, storing up food for the winter that it surely knows is coming. The grasshopper, though he too knows that winter is coming, decides instead to fritter the summer months away—going so far as to make fun of the ant for working so diligently.

Of course, winter does finally arrive, and the grasshopper finds himself stuck in the cold, and hungry. He quickly remembers his “friend” the ant—and hops over to his anthill and proceeds to ask for a handout.

There have been certain animated retellings of this fable over time—in most of those, the grasshopper comes to see the error of his ways and appeals to the ant for a morsel of food in a contrite manner. And, in those “happier” versions of the fable, the ant has enough to share—and does—and everyone seems to live happily ever after. But in the original version of the story, the grasshopper approaches the ant not with a sense of contrition, but with one of entitlement. And in at least one older version of the story, the ant slams the door in the grasshopper’s face.

Respect “Ed”

I’ve not been a huge proponent of automatic plan solutions. Not that they don’t have their place, and not that they don’t have the ability to have a positive impact on plan participation rates. Certainly, some would-be participants just don’t get around to completing or turning in the enrollment forms, and surely others are intimidated by the process. But my thinking over time has been that those who could afford to save were—and that adults should be accorded the respect of allowing them to make their own financial decisions, even when those decisions weren’t the ones I would make, or the ones I think they should.

More recently, I had been concerned that many workers simply couldn’t afford the discretionary savings. But over the past couple of years, the miniscule drop-out rate from automatic enrollment programs has persuaded me that many of those who think they can’t afford it find a way (that, or they haven’t yet figured out that they can opt out). Economics is clearly a factor for some—but studies seem to suggest that isn’t the issue for most.

That’s left me wondering—again—why so many eschew voluntary savings programs, and that’s why, though I am philosophically opposed to mandatory programs (the fact that employees can opt out doesn’t mean that they actually feel that they can, or know how to), these days, I am willing to take a more aggressive stance That was inspired in some part by the whole subprime debacle. Clearly, there were a lot of people who made questionable (to put it mildly) financial decisions—decisions that, depending on who’s making the call in Washington, could come to be underwritten (directly or indirectly) by people who had the good sense not to overextend themselves.

It does not require a hyperactive imagination to see a point down the road where many Americans lack the financial resources to fund their retirement years, including workers who once had an opportunity to participate in their workplace retirement plan—“grasshopper” workers who simply may have made a choice to invest in things other than their retirement security at a time when most of the “ants” who had the chance gladly took advantage.

Of course, “automatic” enrollment is not mandatory participation, and the Pension Protection Act’s provisions (and the required annual notices) may make it easier for those who are automatically enrolled to opt out than it has been up till now. I’ll also concede that, as articulated motivations go, “making it harder for people to shirk their responsibility to save for retirement” comes off as rather, well, harsh.

Nonetheless, we’re all running out of time to do the right thing—and I’m not sure the rest of us can afford to let the grasshoppers continue to have their day in the sun.

- Nevin E. Adams, JD

PPA's SWAY

These days, the Pension Protection Act of 2006 (PPA) is sometimes referred to as the “Pension Destruction Act.” That’s too harsh an assessment, IMHO, but it certainly has a foundation in reality.

Without question, the PPA (it was just a year ago Friday that President Bush signed the legislation into law) imposed some new—and for many plans, harsh—restrictions on funding and accounting for funding. Additionally, it did so after many of the worst offenders and abusers of the system were already “out” (legislation frequently closes the barn door after the cow has escaped), and it did so at a time when many plans seemed particularly vulnerable, and many through no real fault of their own.

We may never know how many problems were averted by its passage—and by the time its new defined benefit provisions took hold, investment markets, interest rates, and contribution levels had combined to make the problems confronting pension plans much less severe than they were at the time of the law’s passage. Mind you, I’m not prepared to say that it protected any pensions, but it probably didn’t—on its own, anyway—trigger the early demise of many programs, either (though it may have accelerated the deliberations). Moreover, the PPA’s explicit sanction of the cash balance design, by some accounts, has given a new lease on life to that hybrid approach, at least in some market segments.

Defined Contribution Impact

As for defined contribution plans, I think the PPA did some good in putting structure around some of the “automatic” solutions, and, for the very most part, took into account some of the aspects of those programs that needed tending to; notably state wage law preemption and the ability to return those “mistaken” contributions. We now have some discrimination testing relief for plans that adopt the automatic enrollment approach codified in the PPA, and if some find the matching contribution requirement too expensive, the contribution acceleration provision distasteful, or the testing relief unnecessary (current safe harbor plans already enjoy much of that relief)—well, it’s optional, after all, not mandatory. If you like automatic enrollment, but not the PPA’s particular flavor, nothing prevents you from implementing your own version. As for the qualified default investment alternative—well, the DoL was working on this ahead of the PPA. Ironically, passage of the PPA may have actually slowed the timing of this particular enhancement—but we’ll have clarity soon enough.

The PPA’s participant notification requirements have been something of a burden, and almost certainly aren’t the aid to participant clarification that they ostensibly were mandated to provide. As for the concept of a fiduciary adviser—well, there’s perhaps not as much precise clarity there as some would prefer. But we do now understand (from the PPA and FAB 2007-01) that the plan sponsor’s fiduciary responsibility is for the selection/monitoring of the adviser, not the advice provided—and for many plan sponsors (and no doubt many advisers), that’s a welcome clarification. And within the guidelines of the PPA, there is another way for qualified fiduciary advisers to be compensated for their services.

Of course, almost overlooked in all the attention paid to the new tools included in the PPA is the fact that it removed the legislative “sunset” on an enormous number of crucial provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001—EGTRRA—including the Roth 401(k), increased contribution limits, repeal of the multiple use test, and modification of the top-heavy rules.

All in all, there may not be much “protection” in the Pension Protection Act—but, IMHO, there’s still a lot of good to be found there.

- Nevin E. Adams, JD

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

A Prospective Perspective

Plan sponsors (and advisers) who think the Pension Protection Act’s automatic enrollment safe harbor represents an easy solution to disappointing participation rates may have another “think” coming, according to the findings of recent industry data—Including PLANSPONSOR’s own 2006 Defined Contribution Survey.

The 10th annual version of PLANSPONSOR’s assessment of the activities of nearly 5,000 plan sponsors found that the median participation rate for plans that had implemented automatic enrollment was 80%. Now, that’s certainly nothing to sneeze at, but it’s not very much ahead of the 75% median rate for the plans in the same survey that had not taken the step toward automatic enrollment—and it’s well short of the outcome that one normally sees touted alongside that option (generally in the 90-95% participation range).

Our survey was based on the experience of plans that had adopted automatic enrollment prior to last summer’s passage of the Pension Protection Act of 2006 (PPA), along with its new automatic enrollment safe harbor (which kicks in next year). Still, since most of those programs have been in place now for more than two years, one might well expect a “better” result.

Traditionally, caution has ruled the day in adopting automatic enrollment. That caution has generally meant that relatively modest deferral rates were chosen, that contributions were invested in relatively conservative options, and that the program was implemented on a prospective basis—only for workers hired after the implementation date. Indeed, for many plan sponsors, the still-active assumption is that workers who had previously “chosen” not to participate (generally by not returning the enrollment form) have effectively already made their decision—to let “sleeping dogs lie.” Nor is this common presumption likely to change of its own volition even with the passage of the PPA, whose automatic enrollment safe harbor does not require a retroactive application.

In fact, IMHO, it seems quite likely that this decision to implement these programs on a “prospective only” basis likely accounts for the negligible uptick in participation rates in automatic plans reporting in PLANSPONSOR’s DC Survey.

What it does mean is that plan sponsors looking for a silver-bullet solution to their participation problem (not to mention the advisers touting such programs as same) may wonder why their prospective solution isn’t turning out to be quite the panacea for those ills they had been led to expect.

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 that have just been brought on board. 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.

That, and being willing to do something about it.

- Nevin Adams

Attention Deficit Disorder

We have long been concerned about the attention deficit of participants when it comes to their 401(k) plans. There’s the problem of getting them to pay attention to the importance of saving in the first place, and of choosing an appropriate level of savings, the challenge of helping them make sound investment decisions—and the biggest challenge of all, getting them to reconsider those choices over time. Our continued inability as an industry (I realize there are pockets of exception to this rule) to fully engage participants on the issue has, ultimately, led to the adoption of automatic plan designs that don’t require the participant to “do” anything other than write the check.

I have a more radical solution to the problem: Let’s make people sign up for their 401(k)—every year.

Before you spit up your morning beverage (apologies if it’s too late for that), hear me out. I will concede that signing up for a 401(k) plan can be a daunting task for a participant, and that it is already logistically challenging for employers (and advisers) to accommodate annual meetings for new workers. But consider this: Is it any more onerous than the annual decision(s) attendant with health-care plan enrollment?

Starting Blocks?

In many ways, the “automatic” solutions are a band-aid, at best. The Pension Protection Act’s automatic enrollment safe harbor requires only a 3% contribution from workers who don’t contribute actively, and steps that up by only 1% a year, and then only until it reaches 6%. That’s where many participants start contributing today, of course—and don’t tell me that an automatic enrollment program won’t turn some (perhaps many?) who today take the time to fill out the forms into defaulted savers in the future. Ironically, the PPA could actually serve to reduce some deferral rates, left unattended (see “Starting Blocks”).

Think those target-date fund defaults will fix poor asset allocation decisions? Perhaps for those that adopt them—but many (most?) plan sponsors seem only to be interested in adopting the change prospectively, doing nothing for those who are already enrolled in the plan. And the PPA’s safe harbor only requires prospective adoption for the automatic enrollment provisions.

Still, even if the PPA’s automatic solutions aren’t a perfect solution, even if they require some implementation oversight, why would I suggest that we make participants (and employers) undertake the painful process of enrollment every year?

I have long thought that the concept of saving for an ambiguous goal like “retirement” was just beyond the short-term comprehension of most people. Just about everything else we focus on has a much shorter term—we have annual budgets, monthly expenses, weekly meetings. Additionally, saving for retirement has largely been presented as something you need to do - - - someday. Most plans don’t allow for immediate eligibility (I appreciate the administrative rationale for some high-turnover workforces), and the vast majority of programs don’t even require that the 401(k) enrollment form be returned, much less completed (see “Participant Directives”). Contrast that with your workplace health-care program—the one you have to choose every year, and return the form—or have a program chosen for you.

Decision Points

Still, to say that an annual 401(k) enrollment is no more painful than health-care enrollment is not to say that it wouldn’t be painful. However, IMHO, an annual enrollment process could well lead to better decisions with these programs. Vanguard published a study on Roth 401(k) enrollment this week—and they found that the strongest correlating factor with participants choosing the Roth was being a new employee (see “Early Roth Adopters Are Active Retirement Savers”). This single attribute increased the probability of adoption by 3.2 percentage points on top of the normal 5% adoption rate—an increase of about 65%. Are these new workers smarter? I doubt it. Younger (and thus more likely to be enamored of the tax benefits of the Roth)? Perhaps, but age, while a factor, wasn’t the determinative factor—tenure was. Moreover, this result corresponded with the findings of another survey (also done by Vanguard) a couple of years ago that found some significant differences in asset-allocation choices—depending on when you joined the plan. These studies—and any number of others—suggest that, once most workers are “in,” they’re “done” making informed decisions about their retirement savings; the amount, the investment, the type. But they also suggest that, at the point of enrollment, participants are paying attention and are, in the aggregate at least, making decisions that seem reasonably informed.

Ironically, IMHO, the current solutions touted for engaging participants more seem mostly to rely on involving them less. That may be what they want—but I’m not convinced it’s what they need.

- Nevin Adams