The Automatic Enrollment Knowledge Gap

Study after study proves automatic enrollment plans drastically increase the number of eligible employees participating in the retirement plan. But, while many plan sponsors are familiar with the benefits of auto enrollment, the majority will have limited experience implementing this feature into a plan. 
 
As an advisor and retirement plan professional, this knowledge gap creates an opportunity for you to help your clients and prospects take action – and do so successfully. Make sure you’ve taken these five points into consideration.
 
1. Balance Entry Dates - Every plan has to define its entry dates for participants who meet the eligibility rules. Whether they are the exact day the employee completes the requirements, the month or quarter following, or even semi-annually, plan sponsors need to consider what works best for their HR and payroll processes. Once the decision is made to add an automatic enrollment feature, make sure the HR and payroll departments have input on what frequency they think will work best.
 
FIX: Help the plan sponsor think through the entry dates. For example, if participation rates are low, the plan sponsor might consider adding entry dates. Or, if employee deferrals are being missed, aligning the plan’s entry dates with the other benefits can help. The goal here is to maximize participation and keep the operational workload of defaulting the new enrollees manageable.    
 
2. Avoid Recreating Data Files - All the employee information that drives a 401(k) plan comes from payroll. Many plan sponsors are using an outdated workflow where they take the payroll data and manually create a contribution file/report to submit to the 401(k) provider. This adds a lot of work and increases the chance for errors.  
 
FIX: Ask the payroll company to communicate directly with your 401(k) investment provider and TPA. This way the data required to properly administer an automatic enrollment plan will be auto-populated into the record-keeping system, saving your clients and prospects lots of time and headache. 
 
3. Get Help with Participant Notices - Most plan sponsors are already distributing required annual notices to participants. Adding an automatic enrollment feature comes with its own set of notices that must be given to new and existing plan participants. 
 
FIX: Ask the TPA and/or record-keeper if they are able to distribute notices to employees for the plan sponsor. Outsourcing this function can reduce your clients’ and prospects’ liability.
 
4. Take Precaution - Once an employee becomes eligible withholdings must begin in payroll at the plan’s default participation rate (unless the employee opts out of the plan). If missed, corrective action calls for the plan sponsor, on behalf of the employee, to deposit 50% of what should have been deferred, 100% of any company match, plus lost interest. 
 
FIX:  Have the client set reminders on a calendar to review each entry date and ensure withholdings are communicated to the payroll company. Check in with the plan sponsor periodically to see how tracking the automatic enrollment is working. 
 
5. Keep Percentages Moving - While automatic enrollment plans show drastic improvements in plan participation rates, they actually have lower average deferral rates as compared to non-automatic enrollment plans. An AON Hewitt study found that average deferral rates were 7.9% for non-auto plans while auto plans had a lower average rate of 6.6%. This suggests that plan sponsors may be setting the default rates too low or not automatically escalating the deferral rates for auto enrolled participants.  
 
FIX: Suggest your client or prospect add a feature to auto-increase deferrals by 1 to 2% annually.  This ensures participant savings rates will increase over time to a level where employees are properly building their retirement nest egg.
 
Plan sponsors can’t be asleep at the wheel with an automatic enrollment plan. By reviewing these five points and making any necessary modifications, the plan can run like a well-oiled machine.