Boosting Results

Rita Fiumara doesn’t hesitate when asked if she sometimes finds sponsor clients hesitating to implement best practices in plan design.

Yes, and rightfully so,” says Fiumara, a Chicago-based first vice president, investments, at UBS Retirement Plan Consulting Services. Employers have tangible concerns about budget constraints and implementation challenges, she says. They also worry about the potential for upsetting employees, should they perceive paternalistic changes unfavorably, she adds.

Advisers cannot simply tell every sponsor its plan should adopt automated design features, Fiumara says. They need to help sponsors identify all the options, understand the implications of each and eliminate the potential pitfalls, she says. “[Sponsors] have to ask: What is the plan’s mission? What is the budget for this? What does our work force look like now, and what will our demographic population look like in five, 10 and 15 years? And what can our recordkeeper do to help us?”

Advisers still have ample opportunity to help sponsors adopt best practices in automated features. Just 40% of sponsors responding to the 2014 PLANSPONSOR Defined Contribution (DC) Survey use automatic enrollment, and 90.5% of those do it for new employees only; 85.4% of sponsors said they had not attempted to re-enroll any employees or participants in the past 12 to 18 months.

“[Sponsors] have reasons, if they haven’t done automatic enrollment,” says Kathleen Kelly, a managing partner at Compass Financial Partners LLC in Greensboro, North Carolina. “As advisers, we can’t just discount that and say, ‘Those reasons aren’t valid.’ Change isn’t easy. The behaviors we sometimes see with participants, such as inertia, can permeate to a plan sponsor.” Still, Kelly finds sponsors receptive to considering design changes that improve participant outcomes. “Every client we talk to about auto-features—it’s not something they’ve shut the door on,” she says. “They’re willing to continue to evaluate it.”

Fiumara, the 2015 PLANSPONSOR Retirement Plan Adviser of the Year, along with six other advisers who were recognized as 2015 Retirement Plan Adviser of the Year finalists either individually or with their team, talked about sponsors’ main hurdles and how to deal with them.

Budget and Time Concerns

“Some employers wonder, ‘Do we have the time or the resources to implement this?’” says Dan Peluse, director – corporate plan services at Wintrust Wealth Management in Chicago. Sometimes they worry about the amount of time necessary to make such changes. Other times, budget constraints—and the impact on match costs in particular—make sponsors wary.

“Many plan sponsors look at it and say, ‘What is it going to cost?’ It’s not that they don’t want to do it; it’s the financial impact,” says John Ludwig, a financial adviser at LHDretirement in Indianapolis.

Some employers hesitate to increase match costs, recalling their discomfort at suspending their match during the recent recession, says Joseph Horlings, managing director – investments, at PearlStreet Investment Management of Oppenheimer & Co. Inc., in Grand Rapids, Michigan. “There’s a lot of sensitivity about cost as it relates to matching,” he says.

To help sponsors with budget concerns, Wintrust works closely with recordkeepers to do a cost/benefit analysis on making design changes. “We do an analysis such as, if they re-enroll the entire population, and 85% to 90% of employees stay in the plan, what will be the sponsor’s cost?” Peluse says. “The analysis will show, if you go down this road, the initial cost is ‘X’ and the benefit is ‘Y’ for your work force,” in average projected retirement outcomes.

Working with a plan’s recordkeeper on this analysis, Wintrust can also supply sponsors with examples showing the impact on hypothetical participants’ retirement readiness using sample employees with demographics similar to their work force. “Sometimes the recordkeeper will do the analysis with us. For the ones that don’t, we have the analytical tools to do it,” he says. “Ideally, I like to leverage the recordkeeper, because that is the most accurate data.”

Advisers also can help address sponsors’ cost concerns by analyzing how to craft the match effectively, Ludwig says. A plan with a 50% match up to 4% of pay contributed could move to a “stretch” match of 25% up to 8% of pay, for instance. “Employers are saying, ‘If I don’t want to spend any more dollars, but I want to stretch what people contribute, how do I structure that?’ You have to use a little behavioral finance with participants: ‘To get the same match, you’ll have to contribute more,’” he says.

And for sponsors concerned about the complexities of auto-enrollment and the time and effort needed to implement it, Sentinel Benefits & Financial Group recently found an effective way to help. Sentinel does monthly, one-hour webcasts for sponsor clients, devoting one specifically to the mechanics of adding that automated feature. “It looked at, technically, how do you do it? What does it mean for things such as payroll?” says John Carnevale, president and CEO of Sentinel in Wakefield, Massachusetts. “That helped a good number of sponsors understand how it works and ‘get over the hump” of their concerns, he says. “Business owners and HR [human resources] people need to feel comfortable. Taking a pragmatic approach makes it real for them.”

Philosophical Issues

Some employers feel that incorporating auto-features would put them in a “Big Brother” role. “[They] feel it is overreaching or meddling in people’s affairs,” Horlings says. “The hesitation I’ve often experienced is a culture of independence. It’s a philosophy of, ‘Our intent is to provide a solid, quality benefit offering,’ but with the mindset of, ‘We help employees who help themselves.’”

One of Carnevale’s sponsor clients typifies the feelings of sponsors that philosophically balk at auto-features. “They say, ‘The plan is for employees. If they want to be in it, great. If they don’t, that’s fine.’ They don’t see automatic enrollment as something they need to do or want to do. They say, ‘If employees don’t want to participate, why should we get in the middle of it?’” Advisers can answer that question by reframing the issue, helping employers see that they and their employees will feel major repercussions of retirement-savings shortfalls. “The best way to get them to [change] their opinion from ‘It’s just a feel-good thing to do’ is to turn it into a business problem for them,” Carnevale says. “Turning automatic enrollment into a solution to a business issue will attract employers that still don’t get it.”

Often, these employers spend more on generous health care coverage than on the employer match, Carnevale says. “I ask them, what do they think will be the result of this strategy?” The answer: It can lead to an increase in older employees staying on the job, both because they have saved too little to retire and because they could not afford comparable health care coverage if they left, he explains. He encourages these employers to take greater control of their health care expenses, implementing more high-deductible coverage with health savings accounts (HSAs) and freeing up additional money to make 401(k) matches.

Kelly also finds it effective to instruct reluctant sponsors about the long-term implications of a financially unprepared work force. If sponsors decline to implement design best practices, she says, “One thing that becomes a question is: What’s the alternative? If folks are not prepared for retirement, what happens? They don’t retire, because they don’t have the financial wherewithal.” 

Employee-Pushback Fears

Some employers worry about the potential for employee backlash or high opt-out rates, even when automatically enrolling new hires—but especially when they think about re-enrollment. Take a hypothetical employer that has offered its plan for 20 years and has many long-tenured employees. “If I know I have employees who’ve declined to participate in the plan each year since they started working at the company, what message will it send if I now try to retroactively auto-enroll them?” Fiumara says of the concern. For a retroactive auto-enrollment to be effective, employers need to take a holistic approach and think about how long the plan has been in place, the average tenure of employees, the salary distribution among all employee classifications and the right deferral percentage, she says.

Most companies that practice auto-enrollment do it only on a go-forward basis for new hires, Horlings says. Yet, auto-enrolling all eligible employees would improve participant outcomes much more. “If you really want to move the needle, that’s what is really going to improve the overall plan health,” he says.

For employers that have yet to do auto-enrollment and doubt its effectiveness, sharing real-life case studies of clients that did it successfully helps, says Michele Casey, vice president at The Casey Retirement Group at Morgan Stanley in Reno, Nevada. For example, Casey works with one sponsor that had a 35% participation rate and problems passing its nondiscrimination testing. “When we added automatic enrollment for all eligible employees, and did it at a [high-enough contribution] level that could affect their testing, we got the participation up to about 75%, and they passed nondiscrimination testing.”

Casey talks to sponsor clients about these examples, but she also connects these sponsors and lets them talk to each other. “We will reach out to our current clients and ask them to share their experiences with other sponsors; we’ve had great success with that,” she says.

Case studies also give employers a reality check on how employees react. For instance, The Casey Retirement Group works with a client that has a highly transient work force receiving relatively modest compensation; at first it was dubious about auto-enrolling everyone. “Its No. 1 fear was, ‘Oh my gosh, if we do automatic enrollment, we are going to have all these employee complaints,’” Casey says. “Out of 1,000 employees enrolled, our team took maybe 20 phone calls, and the opt-out rate was less than 10%.”

When sharing case studies with sponsors, Ludwig says, employers want examples of comparable companies, such as those in the same industry and especially those with a similar salary distribution. “If an employer has a bunch of employees making $10 to $15 an hour, they want to know what other employers with a lot of employees making $10 to $15 an hour have done,” he says.

If an adviser utilizes real-life examples of results at similar companies, “Then the sponsors realize, ‘We can take that step, and the employees are not going to have the reaction we think they will,’” Peluse says. “Until there are tangible results that a plan sponsor can grasp, it is difficult to get sponsors over their apprehensions.”

Little Cost Difference From Auto Enrollment

Automatic enrollment is often expected to increase employer compensation costs as previously unenrolled workers start to receive matching retirement plan contributions, but researchers have found this not to be true.

Using cross-sectional variation in plan features and costs, derived from the National Compensation Survey, researchers Barbara A. Butrica, from the Urban Institute, and Nadia S. Karamcheva, from the Urban Institute and the Institute for the Study of Labor (IZA) in Bonn, Germany, found no evidence that total compensation costs or defined contribution (DC) plan costs differ between firms with and without automatic enrollment. This is the case even though automatic enrollment is associated with a seven percentage point higher plan participation rate.

The research reveals that plans with the automatic enrollment feature offer on average 0.38 percentage point lower maximum matches to their employees. Given an average wage of $26.20 an hour, average participation rate of 68.7%, and an average maximum match of 3.2% in the study sample, the researchers calculated that the 0.38 percentage point lower match rate translates into a savings of roughly seven cents per labor hour. They note that this offsets the additional costs of 6.5 cents resulting from higher participation rates.

The research also showed employers with auto-enrollment plans are setting the default contribution rate well below the rate needed for the maximum match. “This allows them to contribute to the accounts of more workers without necessarily increasing their costs. Our findings suggest that employers might be doing exactly this,” the researchers say in their report. However, they note that more information about the actual employee contributions and how they differ from the defaults is needed in order to quantify correctly the contribution of this factor to the total difference in costs.

The researchers hypothesize that if automatic enrollment increases productivity, either directly by affecting the production function and resulting in a positive marginal revenue or cost savings or indirectly by increasing the marginal product of labor, then some of the gains might be passed to employees in the form of higher employee compensation—further adding to the increase in total compensation costs associated with automatic enrollment. However, since they found no evidence that total compensation costs differ between firms with and without automatic enrollment, they concluded that firms might be lowering their maximum match rates and default match rates enough to completely offset the higher costs of automatic enrollment.-