RSM Resources

At a time when experts are increasingly alarmedabout America’sanemic savings rate, many midsized companies are taking a more paternalapproach to help bolster their employees’ retirement accounts.

Weather Shield, a window and door manufacturer,added automatic enrollment to its 401(k) plan five years ago. The Medford, Wis.,company enrolls all employees in the plan unless they opt out, and it automaticallydeducts 2 percent from participants’ paychecks for their retirement accounts.Since Weather Shield adopted the automatic features, employee participation inthe company’s retirement plan has increased by one third to nearly 80 percent.

"Long-term participation in a 401(k) plan isgenerally the best opportunity most employees have for ensuring adequateretirement savings," says Todd Meyer, the company’s general counsel."Weather Shield’s two-pronged approach of automatic 401(k) enrollment andthe company’s ongoing education campaigns provide our employees with theinitial encouragement and continuing investment education to ensure that theyhave enough money to last what could be 30 or more years of retirement. Recentdiscussions pertaining to the inclusion of automatic enrollment provisions inSocial Security legislation validates the company’s position."

Weather Shield is one of a growing number ofmidsized employers who are putting their 401(k) retirement plans on auto-drive,since many workers lack the time or understanding to make wise investmentdecisions — or even to sign up for retirement savings in the first place. Whileemployees retain the opportunity to manage their own retirement accounts,automatic enrollment has become a promising tool to increase overallparticipation. And other automated features, such as automatic rebalancing, canhelp participants manage their funds after they enroll.

Automatic enrollment growing more common
More than 77 percent of eligible employeeshad balances in their 401(k) plans during the 2004 plan year, according to a2005 survey conducted by the Profit Sharing/401(k) Council of America. Amongmore than 1,000 401(k) plans surveyed, 10.5 percent offered automaticenrollment, up from 8.4 percent in 2003. Automatic enrollment was most commonin large plans: 30.6 percent of plans with 5,000 or more participants reportedhaving automatic enrollment, versus less than 1 percent of plans with fewerthan 50 participants.

Employees typically must opt in to a 401(k) plan anddetermine how much and where to invest their savings, and when to update thosedecisions. Automatic enrollment, on the other hand, places all employees into a401(k) plan unless they choose not to participate. The employer directs pretaxpayroll deductions, typically 2 percent to 6 percent of each paycheck, to eachparticipant’s 401(k) account.

Why do employees need nudging when it comes to401(k) savings? Employees often choose the easiest course available, accordingto "Defined Contribution Pensions: Plan Rules, Participant Decisions, andthe Path of Least Resistance," a study by the National Bureau of EconomicResearch (NBER). When it comes to investing and benefit decisions, employeesgenerally do whatever takes the least effort, including doing nothing, aphenomenon that NBER researchers call "passive decision-making." Byusing automatic enrollment, employers can significantly influence the savingand investment choices of employees — and better meet their fiduciaryresponsibility to help workers save for retirement.

According to NBER, automatic enrollmentdramatically increases the percentage of workers who participate in qualifiedretirement plans. Fewer employees enroll if they need to do something toparticipate, as compared with programs where they have to do something not toparticipate. Put another way, people aren’t likely to opt out of a 401(k) plan.

Other automatic features make 401(k)s easier
In addition to inertia or reluctance toparticipate in 401(k) plans, employees also face several other hurdles, such asdetermining how much money to invest and how to invest their contributions.Several other automatic features can help employees make those decisions,including:

Automatic contribution increases. Some 401(k) plans set a default level for employeecontributions. Financial advisors generally recommend that employees make401(k) contributions at least at the level that qualifies them to receive theemployers’ full matching contribution. A typical match is 50 cents on thedollar up to 6 percent of pay. However, deferring 6 percent of income may betoo high for some workers, especially lower-income employees who are justbeginning to save for retirement. For that reason, many companies beginautomatic contributions at 3 percent, a level the Internal Revenue Servicesuggested in its first notice approving automatic enrollment. Some companiesusing this approach automatically increase the contribution rate by 1 percenteach year, easing employees up to 6 percent or to the level that maximizes thecompany match. Even with automatic contribution rates, employees can opt forhigher or lower levels.

Automatic rebalancing. When participating in a 401(k) plan, employees must choosehow to invest their money. Plans typically offer a range of stock, bond andcash funds, and participants must choose the percentage of contributions theywish to invest in the various alternatives. To help offset the volatility in atypical retirement portfolio, some plans offer automatic rebalancing, whichreinvests assets to ensure the account reflects the participant’s desiredinvestment mix at a given point in time. With or without automatic rebalancing,participants generally can rebalance their portfolios at any time.

Premixed investment portfolios. Choosing the right investments can be daunting,particularly when an investor has many options or is unfamiliar with themarkets. Some 401(k) plans address these obstacles by offering premixed fundsor portfolios of stocks, bonds and cash. For example, a more aggressive premixedportfolio option may be geared to younger investors with longer investmenthorizons, while a more conservative investment mix can be designed forinvestors who are closer to retirement and want less risk.

Automation could be helpful to companies looking to boost employeeparticipation in 401(k) retirement plans as well as boost their investmentperformance. However, all the automation in the world may do no good unlessemployees understand how to accumulate the assets they will need in retirementthrough a well-diversified portfolio. Experts say a comprehensive educationprogram — one that helps employees determine how much they need to save todayin order to achieve a specified level of retirement income — should accompanyautomatic enrollment or any other automated features. Together, automation andeducation can help employees get started, set goals and follow their progresstoward building a comfortable retirement.