Automatic Plan Features Help Participants Engage, Study Finds
Adoption of simplified features in Bank of America Merrill Lynch’s proprietary DC plans, along with making education and other resources more accessible, has fueled steady growth in employee engagement and plan enrollment, the firm reported recently.
In Bank of America Merrill Lynch’s 2017 Plan Wellness Scorecard, nearly two-thirds of employee respondents cited said their employers have been influential in getting them to contribute toward retirement. In particular, employers are making it easier for employees to take control of their finances by implementing auto-enrollment and auto-escalation features, offering digital account access and expanding the benefits they offer to include Roth 401(k)s and health savings accounts (HSAs), the report explains.
In fact, BAML plans adopting simplified features including “express enrollment” (see below), auto-enrollment and auto-escalation climbed by 153% in 2016. One of the most significant findings is that more than 97% of auto-enrolled employees do not opt out.
And perhaps somewhat surprisingly, the study shows that the higher the automatic enrollment default rate is, the higher the levels of participation in their 401(k) plan:
“Express enrollment” also shows promise in enhancing employee engagement, as 401(k) plans with this feature experienced a 78% enrollment rate versus 53% for plans with traditional enrollment processes. BAML defines express enrollment as a streamlined process that minimizes upfront choices, as compared to traditional enrollment, which requires employees to make numerous choices. For instance, employers choose three contribution rates to display and the order in which they are displayed; BAML has found that this often affects employees’ action and employees are often more likely to choose the first option that is displayed.
Employees in BAML plans are also increasing their use of Roth 401(k) accounts. Employees under age 40 make up nearly 57% of those contributing to a Roth 401(k) account, with a substantial decline in usage as you move up the age bracket, according to the findings.
BAML is also seeing significant increases in HSA participation, as employees look for ways to manage health care expenses now and save for future medical expenses. According to Bank of America’s HSA data, there was a 21% increase in the number of employees contributing to an HSA over the past year and a 36% increase in HSA balances.
Other key findings show that digital and mobile technology are increasingly important resources for managing 401(k) accounts and making changes to their deferral rates. When employees used mobile channels to access their account, 16% were used for express enrollments, 13% for beneficiary changes, and 8% for contribution rate changes.Millennials Come Out on Top
Addition of automatic plan features appears to be benefitting Millennials the most, the report found, as 82% of Millennials who were eligible employees made a contribution to their 401(k) account, edging out Generation X at 77% and Baby Boomers at 75%.
Overall, the report shows that more employees in BAML proprietary plans are engaged in planning for their retirement, with a 20% increase in contributions, an 18% increase in deferral rate changes and a 17% increase in plan assets from year-end 2015 to year-end 2016.
The Bank of America Merrill Lynch 2017 scorecard is based on plan participants’ behavior and sponsors’ adoption of new plan design features and services in the firm’s proprietary 401(k) business, which comprises $181 billion in total client plan assets and 3.1 million total plan participants with positive balances at year-end 2016.DCIIA: DC System Can Do Better Without Additional Policy Changes
And a new report from the Defined Contribution Institutional Investment Association (DCIIA) bolsters the arguments of those who support auto features. It contends that leveraging auto features, minimizing money out and helping to eliminate barriers to long-term retirement savings are three key steps that DC plan stakeholders can take to help Americans prepare for a financially secure retirement.
With simulation analysis provided by the Employee Benefit Research Institute, DCIIA’s report, “Design Matters
,” explores the current state of 401(k) plans on overall retirement preparedness in a post-Pension Protection Act of 2006 (PPA) environment, with a particular focus on middle-income workers.
The study emphasizes that the current DC system is significantly different from the one that existed prior to the PPA, as the legislation facilitated many enhancements, including auto enrollment, auto escalation, QDIAs and permanently higher contribution caps. Prior to the PPA:
- 19% of DC plans had auto enrollment; more than 60% of large DC plans have this feature today; and
- 9% of plans offered automatic escalation; more than 80% of plans with automatic enrollment now have automatic escalation.
The paper argues that middle-income workers who spend their entire careers in plans with auto enrollment and auto escalation are projected to experience significantly better outcomes than similar workers in plans without auto features.
In a simulated model comparing middle-income workers who worked exclusively at companies that did and did not offer auto features in their DC plans, the findings show a more than 30% difference in projected earnings saved, by virtue of participating in a plan with auto features.