All hail auto-enrollment! It’s unquestionably a boon for enrollment rates, and 401(k) retirement preparedness overall. Acting in concert with its auto-escalation cousin, financial industry experts generally praise the benefits gained from such retirement plan innovation.
But what about its downside?
A new whitepaper from The Paragon Alliance Group takes a hard look at both auto-enrollment and auto-escalation. Specifically, it finds the main reason to consider automatic enrollment is obviously to help more employees accumulate more retirement savings by removing the inertia that employees succumb to, rather than taking positive action and making informed choices.
“On the other hand, it can become expensive and problematic for some plan sponsors,” it argues. “Why? Execution of specific tasks and reporting are required to have the auto feature(s) work properly. An Employer could face the consequence of unexpected expenses if corrections are required and cost projections are not run.”
With automatic enrollment implementation, it adds, “coordination between all service providers is critical.”
In the complex world of retirement planning and regulations there is no one “silver bullet solution,” the paper notes, and auto-enrollment may or may not be suitable for all plan sponsors.
For example, “[a]re you prepared as an organization to provide your employees with a benefit that states they will have a certain percentage, as little as 1 percent and high as 10 percent, taken from their pay if they do NOT opt out of the benefit?” writes Paragon president Rob Wisner. “Saving for retirement is a necessary thing to do at some point in everyone’s life, so thoughtful conversations with experienced industry experts will provide ideas on the best way for you to engage your workforce, whether you select automatic enrollment or not.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
