Plan Sponsors Seem Pleased with Automatic Features

A new Defined Contribution Institutional Investment Association (DCIIA) poll of plan sponsors found that companies offering automatic enrollment raised their participation rate by nearly 30 percent above pre-automatic-enrollment rates, and that participants enrolled automatically had a favorable view of this enrollment method.

Ideal deferral rate was studied

When sponsors were asked to identify the optimal participant saving rate, only 14 percent suggested a rate below 10 percent. Almost two-thirds recommended a rate between 10 percent and 15 percent. Two in ten sponsors supported a rate greater than 15 percent.

But, more than half of the sponsors set the default percentage under automatic enrollment at three percent, which is inconsistent with the majority recommendation of a deferral rate greater than 10 percent.

New hires are automatically enrolled

About half of the plans have an automatic enrollment provision. Of those, 95 percent apply it to new hires.

Most plans do not periodically enroll existing employees automatically, though more than one-third did complete a one-time automatic enrollment of existing employees.

Participants appear satisfied

About 70 percent of sponsors characterized their employees’ view of automatic enrollment as either very favorable or somewhat favorable. The remaining 30 percent reported that their employees were indifferent toward it.

Two-thirds of automatic enrollment plans reported that employee opt-out rates were less than 10 percent.

Sponsors’ opinions not all favorable

Of sponsors who do not offer automatic enrollment, two-thirds said it was unlikely that they would implement it in the next year. Reasons for not adopting it included that it is unnecessary since participation is already high (23 percent), it’s too paternalistic (19 percent), it is inappropriate in the current economic situation (18 percent) and that it would be too costly in terms of the employer match (18 percent).

Automatic escalation tied to automatic enrollment

Nearly half of responding sponsors have an automatic contribution increase program, and they typically offer it together with automatic enrollment. The most common reasons they cited for automatic escalation were concerns about participants’ financial security in retirement and participant inertia.

About 90 percent of sponsors keep the annual increase at one percent, largely because that amount appears acceptable to participants.

More information on the 2011 DCIIA Automatic Features Survey is available athttp://tinyurl.com/DCIIAAutoFeaturesSurvey.

Kmotion, Inc., P.O. Box 1456, Tualatin, OR 97062; 877-306-5055; www.kmotion.com

© 2011 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.