Are auto features still underutilized in 401k plans
The PSCA’s 57th Annual 401(k) and Profit Sharing Plan survey is out. Lots of great data, but I want to focus on a particular issue here. Auto features.
The evidence is clear that implementing automatic enrollment and automatic escalation features will have a bigger impact on plan participation and contribution rates than any other thing you can do. These features have been available to plan sponsors since about 2009, but adoption rates have been somewhat sluggish – particularly among smaller plans. (DCIIA has an excellent Auto Feature FAQ)
Without going into the whole discussion about auto-features (I don’t think I could say anything new) I found this graphic interesting;
First, why are the smaller plans under-indexing on this important issue? It could be cost, but I don’t think that can explain the whole difference. Does the same % of payroll increase have a larger impact on small employers than on large employers?
Second, if you are going to auto-enroll new employees, why not auto-enroll all non-participants? If it’s good for the goose, etc.
Beyond automatic enrollment, the next step is automatic escalation. Adoption rates for auto escalation are much lower than automatic enrollment. My sense of it is that both of these automatic features are somewhat “paternalistic” and contrary to the basic ethos of defined contribution plans. Auto escalation more-so than auto enrollment.
Right now the top issue plan sponsors are worried about is retirement readiness. I think this is the right focus, as it is clear that you want your people to feel free (financially) to retire when it is time. However, in the same survey we see that when plan sponsors measure success they are not actually looking at retirement readiness. A bit of cognitive dissonance.
In any event, I think this dissonance is actually a bit of a trend/time lag and that plan sponsors will increasingly focus on retirement readiness across cohorts of employees as the key metric for plan success. When plan sponsors use retirement readiness as the key metric for plan success, then they will be more aggressive about implementing these auto features.