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Auto Features: Inertia Beaters, But May Generate Exhaust

Have you driven the Capital Beltway ringing Washington, D.C. at rush hour, or the highways around Los Angeles, Atlanta and a host of other major cities? It takes something to overcome the inertia of hurry up and wait to make real progress toward the end goal. That “something” can be mysterious when it comes to how a traffic jam suddenly ends, but for the retirement industry it can be less inexplicable. Automatic features can help overcome saving gridlock — but they are not necessarily a panacea and can have consequences of their own.

Spinning Tires

The fact that automatic features have the impact they do “speaks volumes on the amount of inertia people have about saving for retirement,” says Aaron Pottichen, President, Retirement Services, at CLS Partners.

For instance: Pentegra in its report on its Millennial saving survey says that 62.75% of the Millennials they studied are saving inadequately at best; 45.1% are saving inadequately, and 17.65% say they are saving nothing.

Lincoln Financial in its 2017 Lincoln Retirement Power Participant Study found that savers acknowledge they are setting aside less than they should be in order to stay on track with their retirement savings needs. The study shows that while two-thirds of plan participants believe they should be saving at least 10% of their salary to stay on track, and 45% believe they need to save 15% or more, just 40% are saving as much as they think is necessary.

Comprehension — or the lack of it — is another part of the explanation for that inertia, according to Pottichen. “I think people don’t take action on the things they don’t understand,” he remarks. Pentegra bears his insight out, saying that many Millennials as well as their older counterparts invest in a 401(k) even though they lack a full understanding of what their retirement goals and strategies realistically should be. “There are a lot of similarities between losing weight and saving for retirement. Ultimately, it’s a lack of knowledge and then taking action once you have the knowledge,” Pottichen adds.

The roots of that situation run deep, Pottichen argues. “We don’t teach personal finance in school, so many people enter the workforce with very little knowledge about finances.” Pentegra reports similar findings, saying that many respondents called it a major concern that their teachers from junior high through college failed to teach them about saving and said it contributes to their uncertainty about how to approach saving.

As a result of the lack of education, Pottichen says, when people reach adulthood, they are functioning with little personal finance knowledge and told they need to start saving for something they don’t understand; in addition, they don’t have a good idea regarding where to start. “So they just don’t,” he concludes.

Breaking the Jam

“I think auto enrollment and its brother auto escalation are fantastic features. We have seen these features make monumental differences in plans where education alone would not have,” says Pottichen, adding, “We know that having these features helps people overcome one of their biggest obstacles, which is inertia.” So how widespread is the catalyst?

Vanguard in “How America Saves, 2017” said that based on 2016 defined contribution plan data, adoption of auto-enrollment has tripled in the last decade. The Society of Human Resource Management (SHRM) in “2017 Employee Benefits: Remaining Competitive in a Challenging Talent Marketplace” said that out of the 3,227 HR professionals who responded to the employee benefits survey it sent in January 2017, 40% offer auto enrollment to new employees. Vanguard reported that 45% of its plans have auto enrollment.

More plans than that told the Plan Sponsor Council of America (PSCA) in its 59th Annual Survey, which reflected the 2015 plan-year experience of 614 DC plan sponsors, that they offer auto enrollment. Almost 58% of plans overall in that study said they do. And Aon Hewitt in 2015 reported that 70% of the 100 employers it studied that offer defined contribution plans have auto enrollment.

Employers are going farther than that. Aon Hewitt says that employers are taking the lessons learned from automatic enrollment and enhancing automatic features. For instance, in its report it said that 29% of the employers it surveyed automatically enroll participants at a savings rate at or above the company match threshold. Nearly 20% of the employers in the SHRM study offer auto escalation, and 27% of those Aon Hewitt studied did. Further, in SHRM’s study, the percentage offering automatic enrollment to existing employees, not just new employees, jumped from 0 in 2015 to 21% in 2016 and 24% in 2017.

“Employers realize that automatic 401(k) features can be very effective when it comes to increasing participation in the plan,” said Rob Austin, director of Retirement Research at Aon Hewitt, in a press release about their study. “Now they are taking an automation 2.0 approach to make it easier for workers to save more and to invest better,” he added.

Pottichen argues that there automatic features also benefit service providers and retirement industry professionals. “A lot of the industry is paid bases off of asset under management, so it’s not surprise to see the industry so supportive of it. Any feature that increases assets under management is something to be supportive of,” he says.

Unintended Consequences

While movement that breaks the jam is a good thing, autos still do generate exhaust — and that includes automatic retirement plan features. Pension Resource Institute Chief Executive Officer Jason C. Roberts says that the retirement law group at PRI has found that an increasing number of plan sponsors are seeking legal advice related to missing beneficiaries — and “presumably this is driven in part by the proliferation of automatic enrollment.”

Beneficiary designations — improperly completed or not made at all — can be a consequence of automatic enrollment, Roberts says. And that has a ripple effect. “While ERISA defaults to paying benefits to the surviving spouse, most of the beneficiary disputes involve cases where there has been a divorce and/or multiple marriages with children from prior marriages,” he notes.

And it’s something that falls through the cracks, Roberts observes. “Many plan sponsors incorrectly assume that this is something that record keepers or third-party administrators will handle for them, but it is extremely rare for service providers to contract for anything other than ministerial (vs. fiduciary) responsibilities. When it comes to making decisions pertaining to the administration of beneficiary-related issues, plan sponsors are often solely responsible.”

While Roberts says that “there is no magic bullet to solve this issue,” he does offer some ideas for how it can be addressed.

  • Insist on receiving a beneficiary designation before allowing the employee to enroll in the plan. Roberts admits, however, that this extra step “would likely defeat the purpose behind automatic enrollment — increasing participation by streamlining the enrollment process. It could also add to the plan fiduciaries’ duties to administer the plan in accordance with its governing documents,” he says.

  • The plan document should provide guidance regarding how to resolve beneficiary disputes, so plan sponsors are encouraged to proactively review issues relating to beneficiary designations and to communicate the process to human resources personnel or others who might be on the front lines of a claim for benefits from anyone other than the employee/participant. “Typically, plans contain language that provides that where there is a beneficiary dispute, the fiduciary will freeze accounts and will not release the monies without a court order or other legal document,” Roberts notes.

  • Consider amending plan to have contesting parties first use the plan’s administrative claims procedures. If still contested after the plan fiduciary renders a decision, Roberts says, the plan then will file “interpleader” action in court and require costs to be paid from individual’s plan account (vs. employer or plan as a whole).

  • Consider enhancing participant communication campaigns, using real life examples of how their intended beneficiaries might incur legal challenges (and related anxiety and expenses) if they fail to properly complete and maintain their information concerning the plan.

Not for Everyone

Auto enrollment and escalation — not to mention health savings accounts — may not be appropriate for low-paid employees who are carrying debt.

And while he may be bullish on auto features in general, Pottichen observes that auto features are not suited to all employers and plans. “The industries where it doesn’t work or creates more problems tend to be retail, quick service restaurants (or restaurants overall) and staffing companies,” he says. Why those industries in particular? “The turnover ratio is high and people are typically not making a lot of money. Many people that are in these positions may be working part-time or multiple jobs and that type of work force usually needs every dollar they earn to survive.”