Auto Enrollment, Roth 401ks Gaining Ground, Soon May Be the Norm
WASHINGTON, DC, June 20, 2007 -- Automatic enrollment and Roth 401k accounts are gaining in popularity and may soon become the norm for defined contribution (DC) plans, according to a recent survey conducted by the Employee Benefit Research Institute (EBRI) and Mercer Human Resource Consulting.
The survey, which covered 163 respondents, was limited to organizations that sponsor defined benefit (DB) plans in addition to DC plans. It found that 66% have either already adopted auto enrollment or are currently considering adding this feature. The adoption rate is lowest among not-for-profit organizations (32%) and highest among the financial/banking industry (88%). In addition, 48% have either already adopted auto escalation – whereby participant deferral rates are automatically escalated until they reach a certain level – or are considering adding this feature.
Under these approaches, employees are automatically enrolled in the savings plan unless they actively opt out or select a different savings rate, thus removing the primary barrier – employee inertia – to joining the plan.
"As organizations come to depend more on DC plans to deliver retirement benefits, automated approaches to saving for retirement are gaining ground," said Dallas Salisbury, president and CEO of EBRI. "The Pension Protection Act added to the momentum by removing barriers and creating incentives for plan sponsors to offer automated features. Based on the trends we are seeing, we think automatic enrollment may soon become standard practice among DC plans."
The EBRI/Mercer survey also found that well over one-third (37.6%) of plan sponsors have already added or are planning to add Roth 401k accounts to their DC plans. The adoption rate is higher for larger organizations, ranging from 28% for organizations with under 5,000 US employees to 60% for organizations with 25,000 or more employees.
Roth 401k accounts got off to a slow start when they first became available in January 2006. The Pension Protection Act (PPA) subsequently removed the threat that the Roth option would expire in 2010. As more plan participants have become familiar with the feature, it appears the accounts are becoming more widespread.
Deferrals to Roth 401k accounts are contributed on an after-tax basis. Once an account has been established for at least five years, distributions can be made tax free (including earnings) upon reaching age 59½, death or disability.
Roth 401k features still present an employee communications challenge. However, according to Patricia Pou, worldwide partner and consultant with Mercer Human Resource Consulting, this should not be a show-stopper for plan sponsors and providers.
"Roth contributions represent an opportunity for participants to achieve tax diversification. We have been communicating the far more complex concept of investment diversification theory to participants for years. In that context, this concept seems almost easier to explain," said Ms. Pou.
About EBRI
EBRI is a private, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement and economic security issues. EBRI does not lobby and does not take policy positions. www.ebri.org
About Mercer Human Resource Consulting
Mercer Human Resource Consulting is a global leader for HR and related financial advice and services, with more than 15,000 employees serving clients in more than 180 cities and 40 countries and territories worldwide. The company is a wholly-owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol:MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercerHR.com.
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