Conversion to Automatic Enrollment

[Guest Una M]

I have a client converting to Automatic Enrollment...the entire eligible population, not just new hires. Has anyone done this before and how much time was allowed for "opt out" before the effective date of the new AE feature. 45 days?

[Guest Benefits Maven]

Worked on this at a previous employer, although I left prior to actual implementation. We were planning on two full months warning, mostly because it was a large population spread across the U.S. and we had to get to everyone. Communication is obviously very key and from what I heard, even though it was a very aggressive communications roll - out there were still people screaming that they didn't know! Still, in the long run it has worked for them. They now pass their discrim tests easily, for one thing! They went in with a 2% default contribution (with a 100% match on that 2%) and a default investment in a balanced fund.

[Guest Una M]

Great info thanks Benefits Maven!!

[RCK]

We added automatic enrollment for employees hired after 3/1/99, and it has been a classic good news/ bad news. Good news is that only 5% opt out. Bad news is that only 5% call back to change from the default percentage and allocation.

If we were to do it again, we would probably make the default 3 or 4%.

We give new hires a nominal 30 days to opt out, but in practice it is more like 35-40 days. We did not sweep existing eligible non-participants, but if we did, we would probably do a 45-60 day notice period for them.

[Earl]

sort of interestingly....the Corbel/PPD 401(k) document (not yet approved) has a provision for declaring auto. enrollment and spearate provision for including current employees as of a certain date. An idea that seems to be taking hold.

[Guest Una M]

The non-discrim tests is a miserable failure for this particular Plan..auto enroll of all existing eligibles is a must if they want to ever think of passing. Their match is far and above more generous than safe harbor and they don't want to reduce it. They want a 2% deferral default but I am inclined to push them to 3% given RCK's experience..thanks to all for the comments!

[Richard Anderson]

"Their match is far and above more generous than safe harbor and they don't want to reduce it."

It may be possible to have safe harbor match as generous or more generous that satisfies the safe harbor. If the current match, for example, is 100% of the 1st 10% of comp deferred, that will not pass because it matches more than the 1st 6% of comp deferred. But a 200% match on the 1st 5% deferred will pass the safe harbor.

[Guest Una M]

Richard, they have a match based on yrs of service. 0-5 yrs 75% of 6%, 6-10 yrs 110% of 6%, 11+ 135% of 6%.

[RCK]

There is a separate thread on the Discriminatory affect of increasing matches. Be sure to take a look at that.

[MoJo]

Not to add confusion to here, but why is participation so low? In my experience, if participation is low because of inertia - ie, a workforce that just hasn't gotten around to it, then auto enrollment is the solution. However, if the reason is something else (lack of understanding/information, low wages, cultural issues, etc.) then auto enrollment is a recipe for disaster. Those problems are better solved through target education and other means.

[Guest FREE401k]

We have a large plan in which we recently enrolled about 1,000 employees who had been hired years ago, before auto enrollment. We treated them exactly as if they were 1500 new hires. We sent them the same "auto enroll pak" we send new hires, and gave them the same lead time in which to respond. We found that, just like new hires, less than 1% of them made any change or opted out of the Plan.

We have also found it true that most auto enrollees do not change how they are enrolled, so it is critically important to enroll them at an appropriate contribution percent and into an appropriate investment fund. No 1% into money market! We don't need lawsuits 30 years from now when they retire broke and sue because they thought the auto enrollment defaults were actually the Plan's investment advise to them.

And one other comment in response to auto enrollment being a recipe for disaster if participation is low because of issues other than inertia. It has been our experience in this Plan, where we have used auto enrollment for about five years now, and where participation was very low because of all kinds of issues including inertia, low wages, high turnover, language barriers, etc. that auto enrollment has worked very well. Plan participation has gone from 38% in 1993 to 95% in 2001. I'm not sure why it would be a recipe for disaster if the reason for low participation is anything other than inertia, unless the thought is that enrolling people who have (supposedly) purposely not enrolled would upset them... It has been our experience that attitude is very important in these kinds of things. The Plan Sponsor believes the Plan is a good thing, whereby they are giving "free money" to the employees (the match). If anyone gets upset that they are enrolled, they are told something like "Well, we try to often do good things for our employees, and feel like when we are doing a good thing, we don't need to ask first. If we decide to give a Christmas bonus, do we need to ask people to sign up first?" (Then of course if the employee still wants out of the Plan, they can get out.) I know this sounds like a cheesey oversimplification, but it really is the attitude and it has worked very well. The employer took this agressive attitude toward auto enrollment at our advise years ago when target education and other means were not working because of the very problems like low wages, high turnover, language barriers, etc.

[MoJo]

The reason I said auto enrollment is a recipe for disaster if implemented for any reason other than inertial inaction is because the other reasons STILL exist after the participants are enrolled. I think in your case, you've exhibited this situation. Why haven't most people auto-enrolled moved their money (such that you said right amount/right investment was necessary for fear of lawsuits 30 years hence?). I applaud your company's attitude about the plan - it is a good benefit, and employees should partake of it, and auto-enrolling them should be perceived as a positive. Unfortunately, too many times I've had clients come to me (I'm in-house counsel for a bundled service provider) wanting to implement auto-enrollment because the CEO can't defer enough. Wrong reason.... Its a more complicated decision than that. Those that don't evaluate the situation appropriately are looking at: 1) lots of opt outs; 2) lots of POST ENROLLMENT opt outs (with either lots of small balances left in the plan, or potentially disqualifying "negative contributions" to correct); 3) increased distrust by employees who's take home just went down; 4) increased requests for loans and hardships (gee, this is a christmas club account, isn't it?); and last but certainly not least: 5) SIGNIFICANTLY increased fiduciary liability - not only is the plan sponsor now responsible for investment decisions (remember, 404© only kicks in after AFFIRMATIVE action by the participant) - how many sponsors are monitoring the "default" fund as being appropriate (especially after the last year or so of market turmoil), AND with respect to the amount auto-deferred (gee Mr. Employer, I thought you knew best and 3% defferral over the last 30 years should have been sufficient for me to retire on...).

Key here is to 1) know what auto-enrollment is intended to solve (i.e. inertia, again); and 2) DO EVERYTHING POSSIBLE to get the auto-enrolled participant engaged in the plan and making decisions for themselves (whether it be deferral changes, investment changes, or even taking a loan - anything, as long as it evidences active participation in the plan).

[Guest FREE401k]

MoJo: I enjoy the lively debate about auto enrollment! Here are a few additional comments: 1) Just FYI, we are not the a Plan Sponsor, we are a 401(k) recordkeeping/consulting/legal firm. 2) We vehemently advise our clients to NOT auto enroll into a fund that is a recipe for disaster. Our clients do NOT auto enroll into money market (but that's a whole different topic - if you want to read more about it, go to http://www.scottburns.com/990221su.htm). 3) We have been using auto enrollment for approx 5 years now and have not seen lots of post enrollment opt outs. Most people who are going to opt out, opt out right away, or they stay in. 4) We agree that most participants do not know how to manage their account, but we disagree that education is the answer. Not because we think most participants are uneducable (though some are), but instead because we see hard evidence that, educated or not, most participants do not properly manage their 401(k) accounts. (Maybe for the same reason that most people don't do their own auto mechanic work or their own real estate transactions - could they learn? Probably. Do they want to? Maybe. Do they have the time? No way.) 5) Regarding auto enrollment significantly increasing fiduciary liability, we think most employers already face huge fidicuary liability as 401(k) participants start to retire without enough money, and that 404© is a hollow promise of shelter. We agree that auto enrolling someone at 2% into money market and watching them stay there for 40 years is terrible, but that is a problem with default investment elections, not with the concept of auto enroll. All auto enrollment does is answer the question "what should we do for employees who don't tell us what to do?" Our position with our clients has been that, since the Plan is a good thing, they should enroll employees who don't respond to the pak they are mailed, instead of declining to enroll them.

[Guest Bill MM]

Does anyone have experience with setting up automatic enrollments without an employer match? Business is tough for this client. They are considering doing two things at once: automatic enrollment and stopping their match.

[Guest Benefits Maven]

If education and "other means" are an option. I was working for a retailer at the time with all employees on commission and they did not want to leave the sales floor for meetings nor did management want them to do so. There was a lot of resistance to any kind of meeting that was not specifically sales related. We found the that usual other means were not successful - nobody read the written materials or watched the videos on their own and there was only a small percentage with web access. For that plan, auto enroll was the only option short of failing the discrim tests by a huge margin every year.

[RCK]

To Bill MM's question: We auto enroll new hires of some groups covered by union contracts, who do not have a match. Our experience with them is essentially the same as other groups that we auto enroll: 95% do nothing--either opting out or changing percentage or investment election.

I think that dropping the match and auto enrolling new hires is not a problem. I would not want to be around if you are going to go back and "sweep". If I did not enroll when given the chance with a match, and now you are going to auto enroll me without a match, I'd be VERY upset.

[Guest Bill MM]

Thanks.

When you add autoenrollment for current employees do you need to do anything regarding the fact that they may have completed an enrollment form in the past that passed on enrolling?

[RCK]

We have not gone back and "swept" existing eligible non-participants. We talked about doing it, but the cost numbers were pretty scary. And the group that we were considering included only people who had not made a positive election to enroll--we were not going back to an earlier system when people actually had to complete a piece of paper either way.

I think that if you auto enroll people who have actively opted out once already, then you just need to communicate a little more aggressively.