More and more 401k participants want “extreme” automatic 401k plans from their employers, according to new research from American Century Investments.
Automatic plan features, such as auto enrollment, deferral, escalation, reenrollment and portability have helped millions of 401k participants stay on track to achieve a secure retirement, even amid severe market volatility and financial uncertainty resulting from the COVID-19 pandemic.
But what makes a 401k plan “extreme” you may wonder? The inclusion of a full suite of automatic features, all done to the extreme, if you will.
Automatically defaulting participants to higher initial deferral rates when they are automatically enrolled, for example, making sure they start off with a deferral rate high enough to take advantage of the full employer match. Then auto-escalating that deferral rate by a percentage point every year, up to, say, a maximum around 15%.
This is how an “extreme” auto 401k plan can turbocharge a participant’s 401k account right from the start, which is something most participants say they’re up for, according to the new study from American Century Investments.
In fact, seven in 10 participants responding to the eighth annual survey said they would be OK with starting at a 6% salary deferral rate (if the plan offers a 6% maximum employer match), and two out of three believe their employer should automatically enroll employees into their plan at a set percentage and increase it automatically each year.
Worried a lot of participants might balk at 6% to start instead of the old standard 3%? Don’t be. Diane Gallagher, American Century Investments VP, Value Add, told 401k Specialist that industry research to date has consistently shown that opt-out rates don’t really change the higher you go, and there’s virtually no opt-out rate difference between 3% and 6%.
“Plan sponsors tend to be more conservative and start at 3%, but the reality is participants are very receptive to starting at 6%, and increasing them by a percentage point every year,” Gallagher said.
Another way to take it to the extreme? Follow up that higher initial default with escalation, and then add an annual sweep to pick up the slackers.
Speaking for her company’s own 401k plan (she chairs the retirement committee) which starts with an automatic 5% deferral to equal the ceiling of the company match, Gallagher says, “every year when we do our health [insurance] open enrollment, anyone who isn’t contributing the 5% is defaulted to 5 unless they say ‘no.’ We ‘nudge’ them every fall.”
Employees like the “nudge”
Also important for employers to know is that 60% of workers feel more positively about a company that offers automatic enrollment, automatic increase and target-date investments, according to Gallagher.
“Nearly eight in 10 participants would like their employer to offer at least some encouragement to save more. When asked what role they would like employers to play, eight in 10 want at least ‘a slight nudge.’ This has been consistent over the years of the study,” she said, adding that older generations are more likely than Millennials to say, “leave me alone.”
Further, four in 10 participants think employers should structure retirement plans to be completely automatic for employees. Men and those with an income of at least $100,000 are even more likely to prefer a fully automatic plan.
Higher match over salary increase
The study also finds a majority of employees prefer a higher match on their retirement contribution over a salary increase.
Specifically, Millennials and Gen Xers are more likely to prefer salary increases than Boomers, and men prefer the 6% increase in salary more so than women.
“Participants value a company match over a salary increase if given a choice. That may have implications for employers as they look at compensation and employee benefits,” Gallagher said. “I think what that speaks to if you look at all of those default features—all those guardrails that a plan sponsor sets up—is that participants are really self-aware. I think we’re all self-aware of our own habits and if things are put in an automatic feature, we’re more likely to stay with it.”
If those dollars go into a retirement account instead of a checking account, the participant is much more likely to have something to show for it at some point because it’s tucked away and growing. “If it hits my wallet, it will disappear,” she said.
QDIA reenrollment
Another way to take a 401k plan to the extreme is by automating Qualified Default Investment Alternative (QDIA) reenrollment. Gallagher says best practices are to do so every three to five years, depending on the plan’s population.
She says in all the plans she’s looked at over the years, there will be people who are close to retirement that have dangerously high equity exposure.
“Why? Because they made a decision when they first enrolled. And inertia works both ways—they haven’t rebalanced and they haven’t looked at it,” Gallagher says, so they may be taking more risk than would be appropriate for someone close to retirement as opposed to being a thirtysomething.
“So what you do in that instance is you are creating an event—creating a call-to-action in which your participant will either be defaulted, or it kind of forces them to look at where they are, and you kind of force them to ratify or affirm that decision,” she says, noting they may in fact be good with taking that additional risk due to other circumstances.
Add it all up
When it comes right down to it, Gallagher stressed that the overall survey results seem to build every year on just how important the role of the employer is in giving participants the best opportunity to be successful in their retirement planning.
“I think it’s so important for plan sponsors, for retirement consultants, to not lose sight of that—the decisions that we make. Those decisions really, truly have impact,” she says.
“What we’re hearing from plan participants is, ‘I appreciate any structure you can give me to help me get to a point where I can eat three squares a day, pay for my health care and live in my house.’ It’s not about the beach and the boat,” she concludes. “It’s about living comfortably and having a decent standard of living. It’s not about affluence; it’s about independence.”
SEE ALSO: