When crafting your company's 401(k) plan, a crucial consideration is the ease with which employees can participate. At ForUsAll, we strongly advocate for automatic enrollment in your organization's 401(k) plan, and for good reason: it diminishes the obstacles to retirement savings and fosters employee involvement.
Why automatic enrollment?
Why don’t people join opt-in 401(k) plans? We had “DAVE,” our virtual advisor, ask employees at a 500 person company why they hadn’t yet joined the company’s 401(k). Forty percent said that they were too busy, and nineteen percent said that it was too much of a hassle.
According to a survey from SHRM, after health insurance, a 401(k) is a must-have benefit. But despite the high demand for the benefit, the same survey found traditional 401(k) enrollment and education practices made it too challenging for many employees to actually using the 401(k).
In many ways, the traditional employee onboarding experience and 401(k) rollout is a study in information overload. Finding the right paperwork, understanding how to fill out that paperwork, figuring out how much to save, which funds to invest in, and how to manage those investments over a lifetime – decisions that are not at all easy, even for financial professionals.
Smart, automatic plan design cuts through all this confusing clutter, combining enrollment, escalation, and investments in a way that optimizes all three. And auto-enrollment is the cornerstone of high participation plan design, increasing plan participation rates from 66% to 91% (according to Vanguard's 2022 How America Saves).
Automatic enrollment required by 2025 - Secure Act 2.0
The SECURE Act 2.0 of 2022 will soon require all new plans to offer automatic enrollment. The new rules will apply to 401(k) and 403(b) plans established on or after December 29, 2022 ("New Plans"). The new requirements include a 3-10% automatic enrollment rate for the first year, an automatic escalator feature increasing the contribution by 1% per year until reaching 10-15%, a withdrawal option within 90 days without the 10% penalty tax on early distributions, and investment of automatically contributed amounts in qualified default investment alternatives (QDIAs).
Auto enrollment tax-credits + startup plan tax credits = a free 401(k)?
Luckily, the government is not requiring you to shoulder all of the costs of the plan on your own. Small business are eligible for an annual $500 automatic enrollment tax-credit plus $5,000 startup plan tax-credit which may cover up to 100% of the plan for the first 3 years. Thats $16,500 in potential tax credits which can easily cover up to 100% of the cost of starting a 401(k) for the first 3 years. Estimate your potential tax credits here.
Smart 401(k) plan design beyond automatic enrollment
What other tactics are experienced human resource professionals using to increase employee engagement with their companies’ 401(k) plans?
Automatic savings rate escalation
Richard Thaler, economist and behavioral finance pioneer, posits that auto-enrollment and auto-escalation should work hand-in-hand: “Most companies using auto-enrollment set the default contribution rate too low. It’s stuck at 3% of salary, which was never intended by the law. Can you get people to save more than the default? Part of the answer is to combine auto-enrollment with auto-escalation. Research I did with Shlomo Benartzi of UCLA showed that even if people think they can save only a little right now, they’re willing to accept future increases in contributions, such as when they get raises. A state-of-the-art 401(k) should start out with auto-enrollment at 6% and escalate to at least 10% or higher.” Read more here.
Easier to understand investment choices
Add default investments to this mix and you have what Vanguard refers to as “autopilot design”: “With an autopilot design, individuals are automatically enrolled into the plan, their deferral rates are automatically increased each year, and their contributions are automatically invested in a balanced investment strategy. Under an autopilot plan, the decision to save is framed negatively: ‘Quit the plan if you like.’ In such a design, ‘doing nothing’ leads to participation in the plan and investment of assets in a long-term retirement portfolio.” Get the Vanguard report here.
Ted Benna, the “Father of the 401(k),” agrees: “…if I were starting from scratch today, I’d get rid of existing investment structures, and automatically put everybody into target-date funds, while continuing to give folks who want to run things on their own opportunities to do so. The reason I like them [target date funds] is that they provide an allocation that professionals agree is in line with what people should be doing. They get a more diverse asset allocation than in general what most people would do on their own. They automatically rebalance, and they reduce risk as you age.”
Automatic enrollment as a cornerstone to a highly engaged benefit
As of September 2016, ForUsAll clients are realizing participation rates of 89% with savings rates of 7.4%. This matters because it shows that we are accomplishing our mission of improving America’s retirement problem. But it also matters to our clients, because they are offering a benefit that is being used. Getting more employees to join the 401(k) plan and save at high rates across the board also help companies keep their plans compliant and pass the annual IRS nondiscrimination tests.
A meaningful part of how we drive success is through smart plan design and building a technology platform that makes it easy for employers to offer plans with automatic enrollment and automatic savings rate escalation. If you’ve been wondering how to build up momentum in your 401(k) plan and get more employees saving for retirement, chat with one of our retirement plan consultants and get more tips on how to boost your company’s 401(k) participation rates.