Wake Up!

Sometimes we ask prospective clients, ‘What have you done after the automatic enrollment to engage those who were automatically enrolled?’ And we get a blank stare,” says adviser Bill Peartree, San Diego-based principal and director of retirement services at Barney & Barney LLC.

Most of his clients roll out a participant-engagement strategy when they do automatic enrollment, Peartree says, but sponsors that neglect to are telling participants they can safely disengage from the retirement-savings process. To those employers who take a hands-off approach, Peartree says, “You really want to make sure that when you ask them to participate in automatic enrollment, you engage them in the plan, so it is a long-term, sustainable strategy we are developing.”

The challenge, of course, is that most people want to spend very little time thinking about their long-term savings. When Bukaty Companies advisers do face-to-face meetings, they first ask participants how engaged they want to get in the process, says Vince Morris, the company’s Kansas City, Kansas-based president of retirement plan services. The typical answer: Not much. So advisers’ engagement strategies need to account for that reality, Morris says. “I am not trying to fight the current. I am not trying to overcome the inertia,” he says.

There is something to be said for accepting the fact that one might be unable to get all participants involved, says adviser Mark Temple, managing director at Slingerlands, New York-based Retirement and Benefit Partners Inc. Temple believes this “new world” of automatically enrolling 401(k) plans may come to more closely resemble that of defined benefit (DB) plans, in which participants have decisions made for them. “I am not necessarily sure that is a bad thing that the employee is not engaged,” he says. “I do not think the work force has changed, from a knowledge perspective.” But even with uninvolved participants, he says, sponsors still need to meet fiduciary standards. “With good, prudent processes, we can make a significant impact on participants—and we do not necessarily have to engage them to do it,” he says. 

Getting Auto-Escalation Rolling 

When it comes to stepping up auto-enrolled participants’ involvement, most advisers cite automatic contribution escalation as the answer. “Employers typically are still at a 3% deferral,” Morris says. “That can be detrimental to a plan, if it does not have automatic escalation.” Although 33.4% of plan sponsors responding to PLANSPONSOR’s 2011 DC Survey have implemented automatic enrollment, only 16.7% have auto-deferral increases in place.

Many plans have installed automatic enrollment, “but they do not want to do the hard part, which is the automatic escalation,” says adviser Mike Webb, a New York-based vice president at Cammack LaRhette Consulting. He points to two reasons: employers’ hesitance to disrupt their employees’ lives, and employers’ reluctance to pay a higher matching contribution. “In a recession, or when companies are recovering from a recession, if you go and say, ‘Hey, I have a great way that you can spend more money,’ they are not inclined to say, ‘Yes’”, Webb notes.

The adviser’s first task with auto-escalation, therefore, is to make employers comfortable with the concept.

Jim O’Shaughnessy and his Sheridan Road colleagues are trying to convince sponsors to get more aggressive about auto-enroll features. “We may suggest, ‘Let’s put them into the plan at a 6% default, or 8%,’” says O’Shaughnessy, a Chicago-based managing partner at the company. “Or we may say, ‘Instead of auto-increasing them by 1%, let’s auto-increase them by 2% or 3%. And let’s not stop at a 10% ceiling; let’s go to 12% or 15%.’”

As automatic enrollment gained steam, Pensionmark Retirement Group sometimes struggled with convincing employers to implement auto-escalation, says Troy Hammond, president and CEO of the Santa Barbara, California-based advisory firm. Pensionmark finds that it helps to start the dialogue with sponsors by performing a plan “health check.” When looking at participant retirement readiness, the numbers show that, for the most part, “you cannot get there unless you have auto-increases,” Hammond says.

Sharing real-life examples of client experiences—and the direct benefits escalations have made on their retirement plan balances and lives—also helps, Hammond says. “Now we have a bunch of success stories. We can say, ‘You think this is scary. We have done this for 10,000 people. Let me tell you what happens if you [add auto-escalation].’ We have so much data we can take to people and show them it works.”

Showing sponsors behavioral finance research about automatic features is also helpful, O’Shaughnessy finds. As advisers, he says, “we need to know what behavioral finance studies say, in terms of what does and does not work.” For instance, a sponsor might think auto-escalation

will cause a lot more people to opt out of the plan, when, in fact, “the statistics show that is not the case,” O’Shaughnessy says. Research indicates a 95% participation rate among plans with deferral rates greater than 3% (see sidebar).

Employers who experience auto-escalation success are also often receptive to designing a smarter match, both from an employer cost perspective and a participant behavioral perspective. “We are trying to think about how employer contributions are made,” O’Shaughnessy says. “Instead of a 50% match up to 6%, maybe an employer can do 25 cents on the dollar up to 12%. We are trying to use the resources available in new, innovative ways.”

Closing the Gap 

Auto-escalation is a powerful ally for participants but needs to be augmented with education and tools. Automatically enrolled participants need to know when they have moved off track from saving enough for retirement.

“Being a best-in-class plan has gone beyond choosing best-in-class investments,” Webb says. “You need to move on to improving retirement outcomes. But, if you wait until someone is 55, it is too late.”

Retirement and Benefit Partners does an individual, one-page “gap analysis” for participants, making them aware of the difference between what they need to save and what they have saved. “We do it every single year, for every single employee,” Temple says, citing two key drivers. First, it can really help give participants a wake-up call. “It may say something like, ‘If you keep going at the same pace, at age 65, you are going to have an $80,000 balance,’” he says. Second, it helps protect sponsors. If a participant or participant’s lawyer later accuses a plan of producing inadequate results, a sponsor can pull out years’ worth of gap analysis given to a participant.

“It’s a free world,” Temple says, and a participant can choose not to make changes. “But at least he has been told. That is our answer to the engagement process for the 40- to 50-year-old set—to say, ‘You need to be aware of this.’” Advisers can invite people who fail to make changes for a one-on-one meeting, he says.

Raising the Bar 

Giving participants a gap analysis means an adviser needs to work with the plan committee to help it decide what percentage of income the sponsor wants people to replace. “Because we are in the infancy of [automatic enrollment], we have set the bar low,” Temple says. “If someone can replace 50% of his or her income, that is better than a sharp stick in the eye. Then, when we start to see more results, we can take that to 55% or 60% or 65% or 70%.” Employees in different age groups may get a gap analysis with different target replacement rates; this is because they will have been automatically enrolled for different lengths of time. People in their 20s might get a 100% target, for instance, while those in their 30s might get a 90% target.

How to get participants to take the next step after that? Pensionmark has had much success holding preretirement educational meetings for those within 10 years of retirement. “The standard model says, ‘You need to replace X% of your income.’ We take a few steps back and say, ‘That is not the best place to start,’” Hammond says. Instead, Pensionmark asks people to first envision what they want their retirement to look like. For some people, it might mean moving in with an adult child and caring for grandchildren, while for others it might mean traveling internationally—two scenarios that require very different savings.

“It’s getting people to get their brain around ‘What is your version of retirement?’” Hammond says.

Pensionmark provides worksheets and workbooks to help people plan to realize that vision. “It is really getting them to think about their balance sheet. ‘Where do you spend your money now? And where do you foresee you are going to spend your money in retirement?’” Hammond says. “It starts them thinking about the realities they are going to face when they pick up their last paycheck.” Pensionmark advisers can then follow up with one-on-one meetings.

For some participants, the reality check can be greatly discouraging. The adviser’s role here is to coach from the sidelines. “We tell them to take baby steps,” Morris says. “If they need to defer 12%, and they are at 6%, they do not have to try to eat all the difference in one increase. Even if they can auto-escalate 1% a year for six years to get to that, it helps.” 

Driving Income Out of Plans

Once they help get automatically enrolled participants thinking about their retirement goals and plans, advisers can help them think—at least a bit—about how to work with their money in retirement. “We try to get people to understand, ‘How much money do you need and what is the best way to decumulate that?’” Hammond says. “We do not go too much into the weeds, but we give people an overview.”

As Baby Boomers age, advisers can expect retirement income to provoke more questions. “The next chapter will be, how do people start to drive income out of these plans?” Temple says. “Now, what do you do with $400,000 or $500,000—how do you turn it into income? We talk to them about strategies for retirement income, and we try to help them find a balance of not putting all their eggs in one basket. A product may guarantee them lifetime income, but what does it cost?”

Even though most employers hesitate to include a retirement-income product in their plan, many still want to grasp how in-plan solutions work, O’Shaughnessy says. “As consultants and investment advisers to plan sponsors, we want to make sure they understand the marketplace,” he says.