401(k) Auto Features Shift Focus of Communications

Emphasis turns from plan mechanics to ensuring adequate outcomes

By Stephen Miller, CEBS Feb 22, 2013

Automatic enrollment and escalation features are well-regarded by 401(k) plan sponsors that implement them, and the automated model works to drive higher participation and deferral rates, according to astudy report from the nonprofit Retirement Made Simpler, a coalition formed by AARP, the Financial Industry Regulatory Authority and the Brookings Institution's Retirement Security Project. Lincoln Financial Group, a financial services firm, also partnered in the 2012 study.

In the U.S., 85 percent of defined contribution plan sponsors reported that automatic features are especially effective in helping participants who consider themselves less educated on retirement matters.

Communications Lag

However, survey findings indicated that the more fully organizations have embraced automatic features, the more strongly those organizations believe participant communication has not evolved apace. Plan sponsors who have implemented a bundle of automatic plan features—automatic enrollment into a qualified default investment alternative (QDIA) such as target-date funds, and automatic escalation—were 56 percent more likely to feel that participant communications and education have not kept pace with the evolution in plan design.

For example, more than two-thirds of plan sponsors reported placing the same emphasis on topics such as selecting investments and asset allocation as they did prior to adopting automatic features. While these are important subjects, the growing use of target-date funds—intended to be a "one-stop shop" that automatically shifts account holdings toward more conservative assets as a participant's retirement date approaches—should relieve those who select this option of the need to allocate retirement dollars themselves among various investment stock and bond fund options.

A More Complex Conversation

Respondents indicated a need to move away from process-focused messages (for example, how to enroll, plan mechanics, investment selection) to conversations around projected outcomes based on participants’ savings behaviors and strategies (such as future monthly retirement income, spending power and retirement lifestyle). However, many have made only a few, necessary changes, without significantly revising their participant education offerings.

“There has definitely been a paradigm shift in plan design that is helping employees automatically amass significant retirement savings,” noted David C. John, Retirement Made Simpler policy advisor. “This opens the door to education and communications that spend less time on plan mechanics and more time on subjects such as projected retirement lifestyle and how much income it will take to live out a comfortable retirement. It’s a more complex conversation—but arguably a more useful one for retirement security.”

Additional survey findings included:

  • Plans with automatic escalation experienced deferral rates of 8 percent or higher compared to the average deferral rates of 4 percent or less for the majority of plans in America.

  • 97 percent of plan sponsors that have adopted the bundle of automatic enrollment, automatic escalation and QDIA said the advantages outweighed any perceived disadvantages, reinforcing the value of the full bundle rather than a single feature approach.

Survey respondents included 201 executives and managers responsible for managing 401(k) and 403(b) retirement plans with assets of $10 million or more. Respondents had implemented at least one automatic feature.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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