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Tuesday, 01 September 2015 19:59

Is “Auto Pilot” the Solution for Your Retirement Plan?

Written by Kristin Dunlevy, AIF®, and Jeanne Fisher, CFP®

Removing all unnecessary hurdles for your employees to save for retirement could help ignite your company’s culture and strengthen your employees’ loyalty. With the right help, your company retirement plan can be designed to bridge the retirement income gap for your participants without requiring them to become proficient in investing, which could have a profound impact with your corporate culture.

When designed properly, the Auto Enroll feature can increase the participation rate of your employees without breaking the corporate budget. Employees are automatically enrolled in your retirement plan once they become eligible, and are required to opt-out if they do not want to participate. Participation rates have been reported to increase from the near 60% to more than 90% immediately after implementing the auto-enroll feature.1

If your Auto Enroll feature is enabled, the Auto Invest feature becomes essential. With this feature, when a participant is enrolled and fails to complete the process required to direct their contributions to their desired investment options, they will be invested in the plan’s default investment option. Your Plan’s default option(s) will need to meet the Employee Retirement Income Security Act (ERISA) Qualified Default Investment Alternative (QDIA) requirements. Historically, most plans’ default option was the most conservative offering within the plan’s line-up, such as a money market or stable value fund. Through the Pension Protection Act of 2006, the Department of Labor (DOL) provides investment loss liability protection for Plan Sponsors from their participants when they select a QDIA as the Plan’s default option(s).

Auto Increase is a retirement plan feature also referred to as auto escalate. This feature automatically increases a participant’s deferral rate on a regular basis - most commonly done annually. When Auto Enroll is launched, many Plan Sponsors begin the deferral rate at 3%. This can potentially send the wrong signal to employees that a 3% savings rate (plus any company match) is all that is needed to save for retirement. One study shows that the Auto Increase feature elevated participants’ savings rate significantly to more than 13% for total contributions within four years.2

Re-Enroll can be a useful strategy to maximize your liability protection provided by PPA of 2006. Under the new law, Plan Sponsors are not liable for participants’ investment loss when their balances are placed in the Plan’s QDIA options. For well established plans that have enhanced their investment options over the years, many participants may not have kept up with all the new and improved offerings. When a Plan implements Re-Enrollment, all participants must make a new election when there is new information. If they fail to make an active election, they will be defaulted into the Plan’s QDIA offering(s). However, caution is recommended here. Well-established plans may have former employees with balances who do not receive internal communication, and may not have opened the plan sponsor mailing in a timely manner to keep their balances from being re-allocated.

One last auto feature worth evaluating is Auto Beneficiary, or default beneficiary. When a Plan implements Auto Enroll, goes through a recordkeeper conversion and/or has a profit sharing component, some participants fail to complete a beneficiary form. When electing to use Auto Beneficiary, the Plan document may include language that identifies a beneficiary in the event a deceased participant failed to complete the required form or if the form is invalid. Considering using these five automatic features could help increase participation in your company retirement plan. These features have the capability to provide desired outcomes for both the employer and employees by potentially maximizing your fiduciary liability protection while increasing your employees’ retirement savings. Placing your Plan on “Auto Pilot” is in this instance, an idea worth looking into.

1 Source: Shlomo Benattzi, “Save More Tomorrow” and “The Importance of Default Options for Retirement Savings Outcomes” by John Beshears, ZJames J, Choi, David Laibson, and Brigitte C. Madian, in Jeffery R. Brown, Jeffery B. Liebman, and David A. Wise, eds., Social Security Policy in a Changing Environment. University of Chicago Press, 2009.)

2 Source: Richard Thaler and Shlomo Benartzi, “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving,” Journal of Political Economy 112, no. 1, pt. 2 (2004). Pp S164-S187.)

Kristin Dunlevy, AIF®, and Jeanne Fisher, CFP® are Financial Advisors and Qualified Plan Specialists with ARGI Financial Group, a Louisville-based financial planning and wealth management firm. Find out more at Advisory services offered through ARGI Investment Services, LLC, a Registered Investment Adviser.