Although familiarity with automatic enrollment and automatic escalation is high among large employers with 401(k) plans, the majority of respondents to a new AARP survey have yet to adopt either feature.
The vast majority (94%) of employers who responded to the survey said they are “very familiar” or “somewhat familiar” with automatic enrollment in 401(k) plans. A majority (78%) are also familiar with auto escalation. Yet, less than half (42%) reported using auto enrollment in their plans. Even fewer (28%) have adopted auto escalation.
When asked why they did not include auto enrollment, employers cited concerns about their employees not liking it (30%), costs (20%), contentment with the status quo (14%) and a lack of information (10%).
When asked about not including auto escalation, respondents said they thought employees would not like it (66%), or that employees would find it confusing (52%). Another one-third of employers (35%) cited concerns about matching costs.
Meanwhile, the majority of employers (58%) who do have auto enrollment reported that they only automatically enrolled new hires when they first adopted the feature. Just over one-third (35%) automatically enrolled all non-participating employees who were eligible for the plan once the feature was adopted.
Michael Herndon, manager of financial security for AARP, says the survey’s findings fall along the trajectory of trends he has been seeing with 401(k) plans. More specifically, a slowdown has followed a period of rapid adoption of the auto features, due in part to the economic recession.
Those employers that were planning on adopting the features have already adopted them, Herndon says. This of course begs the question of whether the recent slowdown is really a temporary fluctuation owed to short-term economic factors, or whether we’re seeing a permanent shift away from features like auto enrollment and auto escalation.
“I don’t believe it is [permanent],” Herndon says. “I think these will become best practices in the way a 401(k) plan works. Employers want employees to build retirement income.”
As a way of explanation, Herndon cites the 30-year development of 401(k) plans.
When the plans were first unrolled back in 1980, they were fairly limited in their investments lineup. So plan sponsors made adjustments like giving employees more investment choices.
But faced with choosing between as many as 30 funds—often ones participants had never heard of—many realized that perhaps there is such a thing as having too many choices. So in response, a feature like auto enrollment was introduced.
“It’s all trial and error,” Herndon says. “The 401(k) plan wasn’t designed overnight. It was piecemeal.” So more than likely, Herndon adds, we will continue to see further progress being made to the 401(k) plan, especially as an increasing number of employees rely on it for their retirement savings.
Although critics maintain that the 401(k) plan cannot be relied upon to provide retirement savings in the same manner as a pension, Herndon says this doesn’t mean the public should give up on the plan.
“Just because it’s not perfect doesn’t mean we shouldn’t have it all,” he says. “Once you layer on the Social Security and personal savings, it all builds up to having financial security in retirement. The 401(k) plan is not too far off the mark of where it should be right now.”
Menchaca is a senior editor at Financial Planning magazine, a SourceMedia publication.
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