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Faced with workers who are often too busy or too
disorganized to bother signing up for their 401(k) plans, increasing numbers of companies
are simply enrolling new employees in the plans automatically, benefits experts say.
"I think if you look forward (five years), 25% of
companies will have auto enrollment," said David Wray, president of the Profit
Sharing/401(k) Council of America (PSCA).
By comparison, in 1997, about 4% of the 200,000-plus
employers offering 401(k) plans had automatic enrollment programs, said Mike Jurs,
spokesman with personnel consultant Hewitt Associates. By 1999, about 7% of plans were
offering automatic enrollment, according to results in a soon-to-be released Hewitt study.
Source: Hewitt Associates
The trend is so recent that additional statistics are hard
to come by, but PSCA is currently gathering data on automatic enrollment, according to
Wray.
Automatic enrollment means that new employees don't have to
sign up for the 401(k) plan when they join the company. Contributions automatically start
going into the plan on the new employee's behalf. This money can either be from employer
contributions alone, or from "forced" deferrals from the employee's paycheck.
"It's akin to a magazine that assumes you are a
subscriber unless you check the "no" box," said Janet Aschkenasy, managing
editor of Plan Sponsor Magazine. Auto enrollment generally only applies to new employees.
Even though the idea of having money deducted from their
paychecks may sound questionable to workers at first, Wray says most don't miss it once
they get going with the program. "Once employees are in the plan and they start
getting (company) matches, they love it," he said.
Still, some employers remain wary because of possible
conflicting state rules, or worries that they would be held responsible for automatic
enrollment investments that don't do well.
Hewlett-Packard: an example
Take a job at Silicon Valley giant Hewlett-Packard Co. and
you're automatically signed up for their generous 401(k) plan. The company automatically
defers 3% of your salary each month into the plan. What's more, it matches that
contribution with an equal amount. If you contribute another 2% of salary, the employer
match is 50%. The icing on the cake is that those company matches are immediately vested.
Hewlett-Packard's actions harken back to the days when
employers took a more cradle-to-grave approach offering housing, health care and
retirement benefits. But, this isn't a throwback, says Vicki Dotterer, a retirement
consultant with Hewlett-Packard. Hewlett-Packard's decision to offer automatic enrollment
to its employees is an effort to get them to take greater responsibility for their
retirement planning.
"The message we're trying to get across is: ' …We
can't do it all. That's why you need to be in a 401(k) plan,'" she said.
Prior to Hewlett-Packard's phase-in of its automatic
enrollment in 1998, about 85% of employees put money into the 401(k) plan. Now,
participation rates could be closer to 90%, Dotterer says.
Growing Popularity
Automatic enrollment has been around for a long time with
traditional pension plans. What's new is that it's being applied to employee-directed
plans. David Wray of PSCA says he knows of several employers planning to start auto
enrollment of new employees on January 1, 2000.
Ted Benna, creator of the first 401(k) plan, says automatic
enrollment plans are growing in popularity among employers with low-wage workers -
manufacturers, retail and service employers.
What's behind these trends? Aside from wanting their
workers to be happy and get an early start on retirement savings, employers have two
not-so-altruistic reasons.
First, they're trying to boost employee retention.
Employees who are waiting for 401(k) employer matching money to vest have an incentive to
stay on the job, Wray points out.
Second, employers need to keep enrollment up -- especially
of lower-paid employees -- so the plans will pass Federal non-discrimination tests. The
IRS only allows a 401(k) plan to enjoy tax-deferred status (i.e. lets participants make
pretax contributions and avoid paying taxes on interest until withdrawal) if the plan
benefits all employees similarly, no matter what their income. If higher-paid employees
are allowed to contribute substantially more than their lower-paid colleagues, they will
get a disproportionate benefit, which isn't allowed.
In short, if a plan is used only by top executives or other
highly paid employees it may be disqualified. The IRS defines a highly compensated
employee for 1999 as one who earns more than $80,000 or owns 5% or more of the company.
So, employers need to get more workers in the plan.
"There's probably a little frustration that employees don't participate at the levels
(employers) expect," said Jim Sullivan, a principal with Arthur Andersen LLP.
Indeed, employers using automatic enrollment regularly
achieve plan participation rates of 95% or better, says Aschkenasy, of Plan Sponsor
Magazine. "That's better than the norm of 75%," she adds.
How Automatic Enrollment Works
With auto-enrollment, when you accept a job with a new
employer, you don't have to complete any paperwork to enroll in the 401(k) plan. It just
happens.
The Internal Revenue Service doesn't have any guidelines
telling employers how much they can withhold from a worker's paycheck. However, a 3%
deduction is most common, says Scott Knowles, senior consultant with Deloitte &
Touche. Some employers merely make contributions to the plan on the new employee's behalf,
without requiring salary deferrals.
For a young worker, even 3% of salary could grow to a
"sizable nest egg" over time, Knowles added.
And of course, you can contribute more if you want to. IRS
rules limit your tax-deductible contributions to $10,000 in 1999 ($10,500 in 2000). (Also,
keep in mind that employer and employee contributions together may not exceed 25% of your
gross salary.)
Unless you give instructions about which fund choices your
money should be invested in, it will be invested in the company's default investment. So,
unless you crack the books and investigate your investment choices, you'll get whatever
management chooses for you. Typically default investments fall into one of two categories
- conservative funds, such as stable value or money market funds, or a diversified
selection of funds.
Hewlett-Packard employees who fail to make an investment
choice have their money automatically deposited into a money-market mutual fund, Dotterer
says. However, the company encourages workers to fill out an investment election form so
that they take over the direction of the retirement account.
If you don't want to be enrolled in the plan at all, you
can ask to fill out a form that lets you opt out.
A Start On Retirement Savings
What does automatic enrollment mean for the employees?
Although some might see it as heavy-handed, it actually means that many folks will get a
start on disciplined saving for retirement.
This is especially important for young people, who have the
most to gain from a long period of compounding. "Young people don't have the
concept" of starting to save for retirement early, said Wray.
On the first day of work, employers typically bombard new
employees with tons of paperwork and new procedures. And getting all the right forms -
computer password applications, taxes, health care and retirement - filled out on time can
be overwhelming. Sometimes folks fail to sign up for retirement benefits simply because
they lost the paperwork or missed a key deadline.
"People don't have the time to read everything or
digest everything," said Judith McMillin, partner with Deloitte & Touche.
What's more, all money deducted from your paycheck and
invested in the plan is yours. If you change jobs, you can take your 401(k) money and roll
it into a new employer's plan or a rollover IRA. And you have the power to choose how to
invest the money.
Employer Worries
- Employers' fears of a legal challenge from states with laws
restricting employee payroll deductions.
- Fear that by automatically enrolling an employee the
employer will be assuming a fiduciary responsibility for the investments.
On the first point, the IRS, at the federal level, has
endorsed automatic enrollments. But some states have apparently conflicting laws on the
books that limit an employer's ability to withhold workers' money.
Still, 401(k) plan-creator Benna is optimistic. "I
don't see the probability of state challenge" to automatic enrollment, he said.
McMillin says that to her knowledge there has never been a
court challenge of automatic enrollment plans. Many employers she deals with have set up
the plans hoping that the Federal Employee Retirement Income Security Act (ERISA) will
take precedent over state law.
On the second point, employers do take on a certain amount
of added fiduciary responsibility for setting up an automatic enrollment plan, Deloitte
& Touche's Knowles said. But he pointed out that if the company also has a defined
benefit pension plan, it already assumed the fiduciary responsibility to select and manage
the investments for that plan.
By picking prudent investment choices for 401(k) plan
automatic enrollees, employers can reduce some of that responsibility, Knowles said.
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