COLLECTED WISDOM™ on Automatic 401k Plan Features
This is an archive of information related to 401k automation features like automatic enrollment.
This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.
If you find a broken link or an items that you feel is outdate, irrelevant or no longer appropriate, please let us know.
Every time it seems there's nothing new to say about auto features, new questions arise. Most of them spring from fallacies that continue to be perpetuated throughout the 401k industry. This article digs into many of the misunderstandings and why they each may be inaccurate.
Source: 401kspecialistmag.com, August 2022
The 50 largest defined contribution plan sponsors custodied by Northern Trust Asset Management have focused on getting workers to boost their retirement savings with automatic features, according to data from the firm. Plan sponsors are using auto-escalation to boost savings, but they are not focused on retirement income or decumulation options for plan participants.
Source: Plansponsor.com, July 2022
Proponents of automatic features for DC plans have long argued that they boost participation and savings rates, and a recent study confirms that belief. "Automatic enrollment in employer-sponsored 401k savings plans has transformed the way that millions of Americans save for retirement," said Joshua Dietch, Head of T. Rowe Price Retirement Thought Leadership, and Taha Choukhmane, Ph.D., MIT Sloan School of Management Associate Professor of Finance in their report.
Source: Napa-net.org, July 2022
This paper finds that 401k savings plans are increasingly offering automatic enrollment coupled with higher employee default deferral rates. Automatic enrollment almost doubles plan participation and successfully gets participants who might not have otherwise saved, saving. Automatic enrollment combined with automatic escalation creates better participation and savings outcomes.
Source: Troweprice.com, June 2022
Legislation moving through Congress would prompt more employers to automatically enroll new employees in 401k or similar defined contribution retirement plans and to increase participants' savings rates over time. Even without new mandates to do so, however, more employers are adopting automatic features to increase employee participation and to encourage employees to save enough for a secure retirement.
Source: Shrm.org, April 2022
Auto-enrolled 401k loan protection is a powerful tool to preserve retirement savings, according to new research from the Employment Benefit Research Institute and Custodia Financial. The study shows a remarkable $1.96 trillion in retirement savings can be preserved if employers automatically enroll employees in 401k loan protection when they borrow from their defined contribution retirement plans.
Source: 401kspecialistmag.com, April 2022
The IRS's Employee Plans Compliance Resolution System offers several pre-approved methods that can be used to correct failures to implement automatic deferrals. The standard method for correcting full-year elective deferral failures (including enrollment failures under an automatic contribution arrangement) involves making a qualified nonelective contribution for 50% of the missed deferrals plus a contribution for the full amount of any missed matching or nonelective contributions. But lower-cost methods may be available if the correction is made within specified timeframes.
Source: Thomsonreuters.com, December 2021
Automatic enrollment is a powerful strategy proven to increase retirement plan participation, but the newest -- and last -- edition of Nudge, a seminal book on behavioral finance coauthored by Nobel laureate Robert H. Thaler, stresses that the benefits of the popular strategy depend largely on how it is implemented.
Source: Vanguard.com, October 2021
From auto-enrollment to auto-escalation to auto-income. This is a 14-page paper on the evolving solutions available to sponsors, addressing fiduciary and portability concerns, and next steps for plan sponsors, recordkeepers, insurers, and consultants.
Source: Iricouncil.org, September 2021
It's no industry secret that automatically enrolling employees in a workplace retirement account has been successful in increasing the number of people saving for their retirement. And due to this success, the adoption of automatic-enrollment workplace retirement plans has grown over time. Although widely implemented, no studies have assessed how employees feel about such interventions. To find out, the author designed an experiment in which people evaluated retirement plans based on their enrollment feature: opt-in vs. automatic enrollment vs. automatic enrollment with automatic escalation.
Source: Morningstar.com, July 2021
The vast majority (84%) of workers that were automatically enrolled in their workplace retirement plan say they started to save for retirement sooner than if they had to take action to make the enrollment decision on their own. However, only one-third of employers currently offer automatic enrollment, and among those that do, just 21% have an automatic deferral rate of 6% of eligible pay, according to the latest quarterly Principal Retirement Security Survey.
Source: Principal.com, July 2021
Eighty-four percent of workers who have been automatically enrolled into their workplace retirement plan say they are glad that their savings have been jump-started. They say auto-enrollment has gotten them on the retirement savings path at an earlier age than if they had decided on their own. This is according to Principal's latest "Retirement Security Survey," which is based on a poll of more than 2,000 workers and retirees, and 230 plan sponsors.
Source: Planadviser.com, July 2021
A new study finds that automatic enrollment not only triples the participation rate of new hires, but that over time the vast majority increase their deferral rates. The report from researchers at Vanguard, found that among new hires, participation rates triple to 91% under automatic enrollment, compared with 28% under voluntary enrollment. Over time, 9 in 10 participants increase their deferral rates, either automatically or on their own, and more than three-quarters of participants remain exclusively invested in the default investment fund.
Source: Asppa.org, March 2021
Automatic enrollment triples the 401k plan participation rate among new hires according to some recently updated research from Vanguard. The research shows default decisions made by defined contribution plan sponsors under automatic enrollment indeed have a powerful influence on participant saving and investment behavior.
Source: 401kspecialistmag.com, March 2021
According to this 17-page Vanguard study, the default decisions made by defined contribution plan sponsors under automatic enrollment have a powerful influence on participant saving and investment behavior. Among new hires, participation rates triple to 91% under automatic enrollment, compared with 28% under voluntary enrollment. Over time, 9 in 10 participants increase their deferral rates, either automatically or on their own, and more than three-quarters of participants remain exclusively invested in the default investment fund.
Source: Vanguard.com, March 2021
A recent industry trade article questions the efficacy of saving early for retirement and notes that there "may even be such a thing as saving too much." What launches that premise is a research paper titled "Is Automatic Enrollment Consistent with a Life Cycle Model?" That turns out to be a relatively fancy academic title for a simple concept: Does automatic enrollment make sense for younger adults?
Source: Asppa.org, March 2021
Instead of auto-enrolling participants at a 3% salary deferral rate, which traditionally has been the case, why not auto-enroll them at a more meaningful 6%? After all, they can still opt-out, and 6% will provide a far more meaningful benefit at retirement than a 3% default rate ever could. While this could backfire if more participants opt-out of auto-enrolment because of the higher rate automatic deferral rate, according to John Hancock's State of the Participant 2020 report, the opposite is the case.
Source: Cammackretirement.com, September 2020
Believing their workplace retirement savings plan is one of the most important benefits their employer offers, a large majority of employees support employer efforts to implement automatic plan features. According to the survey by American Century Investments, some 7 in 10 respondents believe automatic enrollment should be implemented at a 6% contribution rate, and two out of three believe their employer should automatically enroll employees into their plan at a set percent and increase it automatically each year.
Source: Napa-net.org, August 2020
Despite a slight decrease, 401k plans that auto-enroll continue to drive far greater participation, according to an annual report that examines the latest trends in participant behavior and plan design. In its 2020 Reference Point report, T. Rowe Price found that in 2019, participation in the firm's auto-enrollment plans was 85.3%, outstripping non-auto-enrollment plans by more than 40 percentage points. Overall, the firm reports that more than 61% of plans at T. Rowe Price automatically enroll participants.
Source: Napa-net.org, July 2020
Capped by a strong 2019, the 2010s by many measures was the decade of the defined contribution investor, according to Alight's 2020 Universe Benchmarks report. Thanks in large part to employers adopting automatic features, more workers were participating in plans, the average savings rate was up, more portfolios were diversified and loan use was lower compared to the beginning of the decade, according to the firm's annual report, which shows how the DC world has changed over the past decade.
Source: Asppa.org, June 2020
A new study finds that a significant percentage of plan sponsors have embraced the use of automatic plan design features, but adoption may have plateaued to some degree. The DCIIA plan sponsor survey reveals that 69% of plans currently offer auto-enrollment, up from 60% in 2016. And that finding generally holds for both large and small asset-size cohorts. Nearly three-quarters (73%) of plans with over $200 million in assets have now adopted the feature, up from 67% in 2016, while 63% of plans with less than $200 million in assets have now adopted it, up from 51% in 2016.
Source: Napa-net.org, April 2020
The survey, conducted by DCIIA's Retirement Research Center, represents the views of 175 defined contribution plan sponsors and is based on year-end 2018 data. Fifty-seven percent of the respondents represent plans with assets greater than $200 million. The remaining 43% of respondents have less than $200 million in plan assets. This report offers observations relative to prior survey findings, where applicable, and provides historical perspectives on how sponsor behaviors and attitudes towards auto features have developed over time.
Source: Dciia.org, April 2020
Each year, approximately 5 million Americans with small retirement accounts change jobs and are forced by their former employers to take distributions from their retirement savings accounts. This sets off a complicated process that often leaves the individual with less savings set aside for retirement. Auto-portability is an approach that would automatically transfer savings to active retirement plans with the new employers when workers are subject to mandatory distributions. The system would tap into existing recordkeeper databases to match the worker's active retirement account and move it automatically from the old employer's plan to the new employer's plan.
Source: Georgetown.edu, February 2020
There are still many qualified plans that are not taking advantage of automatic enrollment. While the addition of automatic enrollment provisions to a plan requires attention to notification requirements and tracking both positive and negative deferral elections, the increased plan participation and improved testing results that can be gained by adding this feature should not be overlooked.
Source: Consultrms.com, January 2020
There is little doubt that the use of auto-enrollment has helped increase participation rates. But could it also lead to lower savings rates? A new white paper from T. Rowe Price, explores that possibility, examining whether automatic enrollment in a 401k plan increases lifetime wealth accumulation and benefits all participants equally.
Source: Napa-net.org, December 2019
401k savings plans are increasingly offering auto-enrollment coupled with higher employee default deferral rates. Auto-enrollment almost doubles plan participation and successfully gets participants who might not have otherwise saved saving. However, it can also result in participants saving less than those who voluntarily opt in and set their own deferral rate. Auto-enrollment combined with auto-escalation creates better participation and savings outcomes.
Source: Troweprice.com, November 2019
According to research from the Pew Charitable Trusts, companies that auto-enroll employees in workplace retirement plans such as 401ks have participation rates that exceed 90%, well above the 50% for opt-in plans. Unfortunately, many savers leave their contributions set at the default rate, which averages just 3.4% nationwide.
Source: Schwab.com, November 2019
Our company sponsors a 401k plan, but very few of our participants are contributing. We started the plan as an added benefit to help attract and retain employees, but we also truly want to encourage our employees to save for retirement. I've heard a lot about something called automatic enrollment and how it can be a great tool to get people to save, but I really don't know much more about it. What is automatic enrollment and how does it work?
Source: Dwc401k.com, September 2019
The auto revolution in retirement plans (auto-enrollment, escalation, deferral) adds another option with the release last week of the DOL's final Prohibited Transaction Exemption for auto portability.
Source: 401kspecialistmag.com, August 2019
Cybersecurity risk management is no longer an issue plan sponsors can ignore. Auto-portability may be an answer to one of the 401k plan sponsors' cybersecurity risk management concerns. Yes, cybersecurity risk management solutions may be available via the 401k auto features that knowledgeable retirement plan advisors have been touting for the past 5 years. Surprisingly, the technology that makes 401k auto-portability possible may also enhance existing industry best practices that protect plan participants' personal data.
Source: 401ktv.com, May 2019
The IRS has updated the information available on its website concerning automatic enrollment. The site provides basic information regarding an employer's obligations if it decides to offer automatic enrollment and deferrals. It also discusses automatic contribution arrangements, eligible automatic contribution arrangements (EACAs) and qualified automatic contribution arrangements (QACAs). And it addresses the investment of employees' automatically deducted salary deferral contributions.
Source: Asppa.org, February 2019
The request regards information collection for Revenue Ruling 2000-35, which describes certain criteria that must be met before an employee's compensation can be reduced and contributed to an employee's section 403b plan in the absence of an affirmative election by the employee.
Source: Planadviser.com, February 2019
Auto enrollment. Auto escalation. The two have worked hand in glove as 401k plan sponsors tried to entice participants to save for retirement. While the twin auto features are mainstays in 401(k) plans, the popular duo soon might be sharing the spotlight with a new rising star: the automatic drawdown.
Source: Pionline.com, January 2019
Without a doubt, the defined contribution "auto-revolution" has had a major impact on the savings behavior and potential participant outcomes for many retirement savers. A new report details the impact of these plan design elements while offering "five forward-thinking suggestions for how plan sponsors can build upon their plan's existing automatic features and further enhance participant retirement readiness."
Source: 401kspecialistmag.com, December 2018
Aside from employee benefit, companies have myriad incentives to give their employees automatic enrollment. Even companies that hold out may soon be legislated to provide it, so companies that implement it now will be ahead of the curve.
Source: Planpilot.com, October 2018
"Auto-enrollment" is a plan design feature that takes advantage of the common human tendency towards inertia to help employees save for retirement and other purposes. In plans where auto enrollment is used, employees do not need to make an affirmative election to participate in an employee benefit plan. Instead, eligible employees are enrolled at a pre-established level of contributions and then allowed to "opt-out" of the default election.
Source: Boutwellfay.com, October 2018
Auto enrollment serves to overcome a worker's inaction, since many workers are stymied by the complex or overwhelming information retirement plans provide. The effect is dramatic: 92 percent of employees participated in auto enrollment plans, with only a small percentage opting out, while only 57% enrolled in voluntary plans.
Source: Forbes.com, September 2018
Most people view automatic enrollment in a 401k as a good thing, but apparently it has a heretofore unappreciated "dark side." At least that was the focus of a headline in a recent Wall Street Journal article that asked (and answered) the provocative question: "401k or ATM? Automated Retirement Savings Prove Easy to Pluck Prematurely."
Source: Asppa-net.org, August 2018
Enrolling new employees automatically increases plan participation dramatically by eliminating the need for action by the worker. A new survey analysis demonstrates that employers and policymakers can encourage workers to save by using automatic enrollment. Survey respondents repeatedly indicated that regardless of whether they have access to an employer-sponsored plan, their perceived motivators and barriers, or the plan sponsor, they would remain in a retirement plan or program and begin saving for their future if automatically enrolled.
Source: Pewtrusts.org, August 2018
Although 25% of sponsors are not using automatic enrollment due to their fear of participant pushback, 82% of participants are either in favor of or neutral towards automatic enrollment. Among the participants who have been automatically enrolled, 95% are satisfied. Only 1% opted out, and 33% said that if they had not been automatically enrolled, they probably would not have enrolled in the plan. Among those who have been automatically escalated, 97% are satisfied.
Source: Plansponsor.com, August 2018
With benefits from kick starting retirement savings to fostering participant engagement, automatic enrollment has proven itself to be an important plan feature. Yet, this does not acquit it from including its own set of drawbacks. A TIAA study finds the feature's benefit are continuously offset by pre-retirement withdrawals and plan loans.
Source: Planadviser.com, August 2018
While the IRS means well, when reviewing some of the regulations, one cannot help but wonder if someone was thinking, "How can I make this as difficult to understand as possible?" Such is the case with automatic enrollment.
Source: Cammackretirement.comg, August 2018
While automatic enrollment in employer retirement plans has been shown to vastly increase plan participation, many employees tend to withdraw some or all of their account balances before retirement – offsetting automatic enrollment’s positive effect. This study gauges how automatic enrollment influenced savings plan loans and withdrawals at a Fortune 500 financial services firm and how pre-retirement withdrawals affected employees’ retirement plan balances over time.
Source: Tiaainstitute.org, July 2018
Corroborating behavioral finance insights on saving habits, a survey by Vanguard of 8,900 small-business retirement plans found that those having automatic enrollment enjoyed an 83% participation rate, versus 58% for plans with voluntary enrollment. According to the survey, some 63% of employees at businesses that use Vanguard's small-business retirement plan service participated in their 401k plan, versus 61% in 2016.
Source: Investmentnews.com (registration may be required), July 2018
The "crowding out" concern -- that automatic enrollment would stretch already strained financial resources, particularly among lower-income workers -- has long been a sticking point for those advocating caution regarding automatic enrollment.
Source: Asppa.org, June 2018
Generally, automatic enrollment has been a positive development for retirement plans, as it forces individuals who may not ordinarily save to do so at an important time - the commencement of their working careers. However, auto-enrollment is not a panacea. A new study reveals a potential "dirty little secret" of auto-enrollment; namely, that auto-enrollees incur more debt than non-auto-enrollees.
Source: Cammackretirement.com, May 2018
Why this 401k plan sponsor moved from manual. After her payroll/401k administrator resigned, the VP of operations of a 62 person company in the Richmond VA area attending a TPSU program was forced to take over. After suffering through the laborious manual processes, she quickly sought help to automate all processes. Watch the video about her experiences and how she plans to use this exercise to better engage senior management.
Source: 401ktv.com, May 2018
Despite progress, the first wave of 401k plan auto-services had one inherent flaw: They were only implemented on newly hired, or newly eligible, employees. From a benefits perspective, plan sponsors were still viewing retirement plan participation/enrollment as a point-in-time decision. Several new and more effective auto-services are being discussed by advisors and implemented by plan sponsors. Two of these new services can be used to help optimize employee savings and investment behavior periodically after the point of eligibility.
Source: Troweprice.com, April 2018
Plans with an automatic enrollment feature nearly doubled over the past decade according to the Plan Sponsor Council of America's 60th Annual Survey of Profit Sharing and 401k Plans. PSCA found 59.7 percent of plans have an automatic enrollment feature in 2016 compared to 35.6 percent in 2007.
Source: Psca.org, March 2018
The famed behavioral economist compares autoenrollment and escalation to autopilot, get the altitude and heading wrong and it's all gonna crash. What's just over the horizon for 401k saving nudges, and what dynamic will digital innovation play? Here's what advisors need to know.
Source: 401kspecialistmag.com, March 2018
A defined contribution plan "re-enrollment" has become a retirement plan industry best practice. This 8-page white paper addresses the most common preconceived notions around re-enrollment's and provides fiduciaries the context, data, and legal support to evolve toward an informed embrace of a re-enrollment's value.
Source: Qualifiedplanadvisors.com, February 2018
While the most common default deferral remains 3% of pay (used by 36.4% of plans), more than half of those with automatic enrollment now have a default deferral rate higher than 3%, according to a new survey.
Source: Asppa.org, February 2018
The Director of Administration of a 50 employee law firm discusses some of the challenges associated with mobilizing the entire workforce around the tax-qualified retirement plan.
Source: 401ktv.com, January 2018
The auto-enrollment trend has grown increasingly more commonplace in the workforce as companies look for ways to combat growing employee debt, particularly among younger generations (who typically own more student debt, but who also lack extensive financial literacy). But it's not exactly the silver bullet to solving the many complications plaguing retirement overall.
Source: Hrdive.com, January 2018
The benefits of automatic enrollment in 401ks are all but a given, and a major reason Richard Thaler, a behavioral economist at the University of Chicago, won last year's Nobel Prize in economics. But now new research has arrived that could wreck it all.
Source: 401kspecialistmag.com, January 2018
In the realm of retirement savings, auto portability is the public policy equivalent of bacon, great by itself, but even better when mixed with other retirement initiatives. In fact, for many public policy plans to be palatable, auto portability is an essential ingredient.
Source: 401kspecialistmag.com, January 2018
The belle of the retirement plan participation ball is auto enrollment. And a potent tool it is. But a recent article suggests it may not only be an elixir, it may also cause a delayed hangover.
Source: Asppa.org, November 2017
Fueled by the popularity of nudging practices, the practice of enrolling employees automatically in retirement savings plans has become widespread in the United States over the past decade. The logic of an automatic retirement savings plan is compelling. However, a majority of people enrolled in automatic retirement savings plans are not saving enough.
Source: Psychologytoday.com, November 2017
Plan sponsors continue to embrace best practices when it comes to running their retirement plan. Automatic enrollment, higher initial deferral rates, and financial counseling are just a few that more employers are adopting.
Source: Planadviser.com, October 2017
Automatic plan features offer numerous benefits. These positive impacts occur amidst a backdrop that surprises many employers: employees favor automatic features and appreciate an employer that utilizes them. This 7-page white paper will help employers to strengthen their commitment through a thoughtful and informed automatic enrollment and escalation structure.
Source: Qualifiedplanadvisors.com, August 2017
Although the number is slowly shrinking, many 401k plan sponsors remain reluctant to institute auto-enrollment and auto-deferral increase features. However, the fact is inescapable: Plans with these features generally have higher participation rates and account balances.
Source: Lindquistcpa.com, June 2017
Are you a plan sponsor reviewing your plan and wondering to yourself, "Why is my plan not performing competitively against others," or even more so, "How do I increase employee participation in my retirement plan?" The answer could be, as we will outline in this post, something as simple as adding auto features to your plan design.
Source: Pension-Consultants.com, June 2017
Automatic features can help overcome saving gridlock, but they are not necessarily a panacea and can have consequences of their own.
Source: Asppa.org, June 2017
Plan sponsors are eager to improve participants' retirement outcomes. Reenrollment is a powerful way to steer employees into effective investment options. However, some plan sponsors have balked at the idea.
Source: Abglobal.com, June 2017
In the U.S., TDFs have consistently had positive gaps because U.S. investors contribute to their 401k savings with every paycheck, and TDFs reduce bad market timing decisions.
Source: Plansponsor.com, June 2017
The youngest employees and DC plan participants often want more automated features to their plans, and most assign their plan sponsors some responsibility for helping them choose the right investments to fund their retirement while it's still decades away.
Source: Blr.com, April 2017
This article looks more closely at features such as automatic enrollment and automatic increases or escalation, and hopefully will help you determine whether they are right for your plan.
Source: Belr.com, February 2017
Inertia is a powerful force in nature, and in human behavior. Even the most proactive and engaged plan designs (and plan designers) can, over time, slide from being in a groove to being in a rut. Here are three ways to reinvigorate automatic plan designs.
Source: Asppa.org, February 2017
A new "auto" aims to drive retirement savings higher. It's called auto-portability, and it would enable a separating employee to easily roll assets into a new employer's plan. While the notion has been percolating for some time, a growing body of research is highlighting the benefits of consolidating employee assets so they can better grow their retirement nest eggs.
Source: Institutionalinvestor.com, January 2017
Plan assets for 401k plans and similar types of defined contribution plans have topped $7 trillion due to continued growth in employee contributions. Part of this increase is not due to employees consciously saving more; it is due to the continued growth of both auto-enrollment and auto-escalation features in a growing number of retirements plans.
Source: Schneiderdowns.com, January 2017
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