Automatic Enrollment at our company - less than 10% are changing their

[RCK]

We implemented an Automatic Enrollment (Negative Election) program nearly two years ago. Eligiblity is 90 days, and at that point the employee has 30 days to "opt-out". If they don't opt out, they are auto enrolled at 2% into a Stable Value fund.

The good news is that only about 5% of the eligibles are choosing to opt-out. The bad news is that less than 10% of those who were auto enrolled have either increased their deferral percentage above the 2%, or changed Investment elections.

My understanding is that our experience is not unusual, and my question is whether anyone has successfully tackled the problem of inertia in deferral percentage and investment elections.

[MoJo]

To steal an old real estate saying - the three most important things in solving your problem are education, education, and education. That said, try a reverse tiered match. Use a new employee orientation meeting to "strong arm" them into active, vs. negative participation.

Actually, our experience (as a bundled service provider) is almost opposite of yours - 92% make a change within 1 year of auto-enrollment.

[Kirk Maldonado]

MoJo:

Do you know if the majority of the changes increased or decreased contribution percentages?

[MoJo]

Increases, mostly (but by far not a majority). Most of the changes were investment allocation changes.

[Guest Una M]

Inertia is an awful thing! I agree that education is the answer and this is what I have done to help my plan sponsors with AE. Payroll stuffers about the importance of retirment savings for example..along with meetings to get in front of participants to tote the Plan. Most importantly HOW to make deferral changes needs to very clearly and repeatedly explained.

[John A]

One possiblity is to change the automatic enrollment to a percentage high enough to get people's attention - say 7% or 10%. While this has some obvious drawbacks (especially if there is a match), - it does tend to force people into thinking about what they really want to do. 2% may not be worth bothering about, a higher percentage generally is. Plan sponsors should be made aware of the possible costs if they take this approach.

[RCK]

Thanks for everyone's thoughts.

Una M: I wish that we could do payroll stuffers, but with heat sealed checks that is impossible. We have targeted mailings to the poeple who were auto enrolled and made no changes, but have not had much luck. I do like your thought about reinforcing the mechanics of making changes to deferral percentages and investment elections. We will include something along those lines in the next round.

[MoJo]

John A - I like the idea, but would be afraid that it would cause a backlash of opt-outs. We like to see the default rate set below the match - so you can educate on the value of the match, and the money left on the table.

[John A]

MoJo,

While opt-outs would almost certainly increase, I believe the experience of at least one plan that tried this approach was that reductions were by far more common than opt-outs, and plan participants sought out education and made, at least arguably, educated decisions about their election. And some newly educated participants increased their election. The reaction in any particular plan might have a lot to do with the demographics of the plan population.

The high percentage only works if it causes employees to talk to plan represetatives about how the plan works, and the plan representatives are equipped to talk about the advantages of deferrals.

[Greg Judd]

I'm with John A on raising the auto enrollment figure. Your evidence suggests inertia is the strongest force at work - so work with it.

7%+ may be too high, but how about doubling to 2%? Or raising to the organization avg+ 1%? Enrollees still have the opt out window to permit their action.

My hunch is that benefit election inertia is overwhelmingly the rule, even where there's evidence of competent educational efforts. Maybe a subject for a separate thread?

[MoJo]

I'd still be a little concerned here. I mean, selecting the default rate, IMHO, is a fiduciary decision, as well as a wage and hour one. Too much control in the hands of the employer may not be "perceived" well by the employees, or the (state based or federal) regulators - and lets keep in mind we still have no definitive answer to the question of ERISA preemption on negative elections. I understand the ability to opt out mitigates here, but..., I generally counsel my clients to do a lot of soul searching before making this decision. The decision is not one of getting maximum participation, but of doing the right thing, and being prudent about it....

[RCK]

I agree with MoJo. We choose a 2% default rate because our primary goal was to get eligibles involved--it was not specifically designed to increase our allowable HCE contributions. And we did not want to bump up against wage and hour laws too hard.

The context behind our decision includes two important points: our match formula caps out at 5% of pay, and a significant portion of our population is typical retail-- young, relatively low paid and high turnover.

If we had an opportunity to do it again, we would probably make the default rate 3% (and would allocate the contribution 50% Stable Value and 50% S & P Index).

[david rigby]

Kudos to MoJo for reminding us about "fiduciary decision" and good point about remembering what the point is. Using the automatic enrollment to enhance the HCE deferral percentage, other than small increments, should not be the major focus of AE.

Of course, we should not expect that any amount of "education" will solve this (or any other) problem, but it can help. Many years ago, when I was administering and communicating a new 401(k), we talked about the match a lot, using the phrase "free money." It helped, but we were glad that no corporate attorneys were in the room.