Financial Planning, Retirement, Small Business

Employers Must Embrace Automatic Plan Features

8/31/18 8:00 AM

iStock-626627280.jpgMost participants in 401(k)s and other defined contribution (DC) plans expect their employers to encourage them to set money aside and even provide some guidance on how much to save, according to a recent multi-part J.P. Morgan study. Specifically, 76 percent of surveyed DC plan participants said that they believe their employer has “at least some level of responsibility” for helping workers set money aside for retirement. Seventy-nine percent of respondents also said that they feel employers should encourage workers to contribute to the company-provided retirement plan, and 58 percent want some sort of recommendation from employers on how much should be contributed to the plan on a regular basis.

Another 44 percent of surveyed workers said that they want their employer to notify them if they are not saving enough for a comfortable and secure retirement, and nearly one in five respondents would give their employer the authority to adjust their contribution rate as needed. Fortunately, many businesses appear to recognize how important such issues are to workers, and an earlier plan sponsor survey conducted by J.P. Morgan even revealed that 82 percent of employers feel responsible for the overall financial wellness of their employees, up from 74 percent in 2015. An increasingly common way that employers will support their workers’ long-term financial well-being is to automate the saving process, and 64 percent of all DC plans in the J.P. Morgan sample had already implemented automatic enrollment, and half had incorporated the automatic escalation of participants’ contributions.

Among surveyed sponsors yet to utilize auto features, the most-cited reason was a fear that workers would feel their freedom of choice was being limited. That would be an understandable concern if we saw most employees quickly opt out of a plan after being automatically enrolled or reduce their contribution rate after an auto-increase. Little evidence of this behavior, though, could be found in J.P. Morgan’s data. For example, only 1 percent of the workers in the more recent survey who were automatically enrolled in a DC plan opted out. Further, 95 percent of auto-enrolled respondents reported that they are satisfied with their experience, and a third even admitted that they likely would not be participating in the company’s DC plan if they had not been automatically enrolled. Similarly, just 6 percent of participants whose contributions were automatically escalated decreased their deferral rate, and less than 1 percent stopped contributing.

More importantly, employers should not only embrace the use of automatic plan features but also make an effort to incorporate auto-enrollment and auto-escalation. Indeed, 62 percent of participants in plans with both automatic features expect to be able to retire at their ideal age, while just 46 percent of those who were only automatically enrolled reported the same level of confidence. Moreover, eight in ten participants in plans with both automatic features expect their savings will be able to last throughout retirement, compared to just 47 percent for individuals who were only auto-enrolled. These plan features are especially beneficial for workers that require a bit of a nudge to get their retirement savings on the right track, e.g. the 40 percent of participants who were notified that they need to set more money aside but did not because they either meant to make a change and never got around to it (12 percent) or did not even consider doing anything (28 percent).



Sources: J.P. Morgan

Post author: Charles Couch