Making sure Americans are saving enough for retirement is a key political issue these days, and auto-enrollment may well be the solution. “At a time when the average worker needs to be saving more to provide for a long, expensive retirement, (research suggests) a need for more widespread auto-enrollment among employers large and small,” according to ThinkAdvisor.com.
Automatic enrollment “allows an employer to automatically deduct elective deferrals from an employee’s wages unless the employee makes an election not to contribute or to contribute a different amount,” according to the IRS. Some employers – about 29 percent – who use it may set their employees at a contribution rate high enough to receive a company match, writes Marlene Satter for benefitspro.com, citing Aon Hewitt research. Others – about 27 percent of those Aon Hewitt surveyed – auto-enroll employees at a lower threshold and eventually increase that amount into enough to receive a company match, Satter writes.
Such plan features can increase participation rates to notable highs, writes Nick Thornton for benefitspro.com, citing Vanguard research that found participation rates of up to 91 percent in programs featuring auto-enrollment. By comparison, those with voluntary enrollments have a participation rate of 42 percent.
Auto-enrollment may be an answer to nation-wide concerns that Americans aren’t saving enough for retirement. “Is a nationwide mandate for private employers’ auto-enrollment on the horizon?,” ThinkAdvisor.com writes. “Given recent state and federal legislation, it doesn’t seem out of the question.” The site points toward Illinois’ Secure Choice Savings Program, which will mandate automatic enrollment for Roth IRA payroll deductions by July 2017, and Congress’ Smart Savings Act, which is expected to auto-enroll federal employees in higher-risk funds.
President Obama’s current proposed budget pitches the idea of requiring “employers with 10 or more employees who don’t already offer a retirement plan to automatically enroll those employees in IRAs,” Kristen Ricaurte Knebel writes for bna.com. “This proposal has the potential to give 30 million more workers access to workplace retirement plans, according to the budget.” The President has also proposed increasing tax credits for small employers who auto-enroll their employees. “Through this proposal, tax credits also would be available to employers that start automatically enrolling workers in already existing plans, according to the spending plan,” Knebel writes. However, ThinkAdvisor hasn’t ruled out the idea that the government may involve its myRA savings vehicle – it’s much like a Roth IRA, with much lower risk and return – as it sets the rules for auto-enrollment.
While it’s impossible to predict exactly what auto-enrollment requirements may look like, advisors can help their clients understand the benefits of auto-enroll features on their plans sooner, rather than later, and for all employees, especially those who are established already. These employees may not be receiving the benefit of auto-enrollment features, Thornton writes. “Half of the plans in the Vanguard universe that implement automatic enrollment do so only for new hires,” he writes.