Power of Auto-Enrollment and Auto-Escalation—By the Numbers: ASPPA Annual

Is auto-enrollment and escalation a good or bad thing for participants?

It might seem like a settled question, yet nonetheless asked at a Monday morning workshop at ASPPA Annual in National Harbor, Maryland.

While attendees overwhelmingly felt both were a net positive, there were outliers. The session, which took a fun look at two fictional secret agent plan participants—007X and 401(k)—focused on the benefits of voluntary enrollment vs. auto-enrollment and auto-escalation.

It started with a recap of the importance of retirement planning in today’s workforce, which included longer life expectancies, lack of pension plans, Social Security “uncertainty,” increased healthcare costs, changing job markets, rising costs of living, financial independence, debt burden, the need for tax efficiency, and overall peace of mind.

Panelists Jeremy Palm, a Partner with Employee Benefit Plans at EisnerAmper and Frank Porter a Relationship Manager with Empower, and moderator Amy Garman, a TPA Internal Retirement Plan Counselor with Capital Group, then turned to the percentage of employees that voluntarily enroll in 401(k) plans, which they said depend on many factors, including the industry segment, the amount of employee education, age and income factors, and plan features.

However, automatic enrollment often exceeds 85%, while voluntary enrollment ranges between 40% to 60%. Coupled with matching contributions, “the participation rates may be higher, often exceeding 70% or 80%.”

Running through the pros and cons of each, they found that voluntary plan pros include employee choice, no administrative burden, and lower initial costs, while the cons include low participation rates, missed retirement savings, and uneven retirement preparedness.

Pros with auto-enrollment include higher participation rates, reduced procrastination and default investment options, while cons include reduced employee choice, opt-outs and increased administrative complexity.

The impact of adding auto-escalation to a 401(k) plan includes increased retirement savings, gradual contribution increases, compound growth, improved retirement preparedness, high account balances, reduced risk of outliving savings, overcoming procrastination, a reduced decision-making burden, employee satisfaction, financial wellness, and peace of mind.