In 2006, Congress passed the Pension Protection Act, which authorized employers to enroll workers in retirement plans automatically. According to the IRS, automatic enrollment is the ability of employers to contribute a certain percentage or amount from an eligible employee’s paycheck into an employee’s retirement account. Employees retain the right to opt out of the program or change the deducted amount. Auto enrollment for defined contribution plans can increase saving rates. It also serves to overcome an employee’s inertia, as many workers find enrolling to be time-consuming and overwhelming. The employer sets the initial level of deduction, helping employees to save more.
Growth in Automatic Enrollment
In the past decade, participation in automatic enrollment – both by employers and employees – has taken off. Companies with auto enrollment have more than doubled in the past 10 years, from 15 percent in 2008 to 33 percent in 2018. Over the same time period, average savings among automatically enrolled employees rose from 4 percent to 6.7 percent. Currently, participation in auto-enrollment plans is at 87 percent, while participation in plans without auto-enrollment is only 52 percent.
But the picture is not all rosy. More than 70 percent of plans use default contribution levels of 3 percent or less, which results in poor employee preparedness for retirement. Vanguard suggests that in order to be ready for retirement, employees need their total contributions to equal 12 to 15 percent of their annual pay. The antidote is to use escalation, where the percentage or amount contributed is increased by a predefined number every year, up to a maximum, usually 10%.
Why Enable Automatic Enrollment?
Aside from employee benefit, companies have myriad incentives to give their employees automatic enrollment. Even companies that hold out may soon be legislated to provide it, so companies that implement it now will be ahead of the curve. Reasons to add automatic enrollment to a plan include:
- Helping employees save for retirement. As the workforce becomes increasingly transient, it will be important to help employees save for retirement on an on-going basis. Incidentally, automatic enrollment is most effective for employees who have been with a company fewer than eight years.
- Reaping tax savings for the company. The IRS offers a few tax breaks for employers who offer automatic enrollment, including a $1,500 tax credit and tax-deductible employer match.
- Attracting stronger talent. With a high cost of living and stagnant wages, saving for retirement is hard; and a historically tight job market means that finding good employees also is difficult. Giving employees a way to save for retirement automatically is a strong incentive that will help with recruitment.
- Making compliance with nondiscrimination standards. The Employee Retirement Income Security Act (ERISA) tests employers’ retirement plans for discrimination against employees with low incomes. Automatic enrollment and escalation happens across all ranks of employees, leading to higher participation and contribution rates than would otherwise be achieved by lower income workers.
Receive Expert Help
Automatic enrollment is not a panacea. It must still be complemented by education, communication, planning tools and investment advice. Employees should understand the matching contributions offered, as well as know that just because it is automatic does not mean that it will not take any planning on their part. Contact PlanPILOT at (312) 973-4911 or info@planpilot.com to find out how we can partner with you to improve your retirement savings plan and its participation rates
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