Another, though less significant, demerit to automatic enrollment might be an increase in administrative costs. That sets up another choice for employers: Should they charge those costs back to participants — thereby diminishing their retirement savings — or should they eat those costs themselves? Retirement-plan record-keepers and third-party administrators typically provide invoices to plan sponsors for their services on a per-participant basis. Aon’s Smith says this cost can be charged back to the participant, as long as it is reported transparently (which is itself a contentious issue; see “Courting Disaster,” May).
Automatic-enrollment plans also pose a special penalty risk: companies that don’t provide timely notices to employees regarding their automatic enrollment can be hit with a fine of $1,100 per day by the U.S. Department of Labor (DoL). “You have to tell employees that within 30 days money will be taken from their paycheck and invested unless they inform you otherwise,” says TRI-AD vice president of compliance Judy Simons.
Balanced against the advantages of increased plan participation, those caveats haven’t deterred many employers from automating 401(k) enrollment. A survey of 1,100 companies conducted earlier this year by Aon found that 30 percent currently offer it and another 23 percent expect to offer it in the next two years. Jeff Fick, vice president of human resources at RLI Corp., a Peoria-based specialty-lines property-and-casualty insurer, says the burdens of the provision have been light. “The drawbacks are nonissues for us,” he says. “This is a good thing, and over time will become routine.”
Another enhancement, if implemented correctly, is a DoL provision issued under the PPA that allows employers to be less risk-averse in terms of the investment choices they offer. The provision relieved employers of their fiduciary liability to employees who pick options that perform poorly.
Many plan sponsors have traditionally provided a menu of investment choices heavy on fixed-income, stable-value options, believing the safe course was to help participants preserve capital. Cognizant that such options breed low returns, the DoL issued rules in September 2006 that relieved employers of their fiduciary responsibilities as long as worker 401(k) contributions are invested in a Qualified Default Investment Alternative. The QDIAs must be highly diversified portfolios and must not contain employer securities among the mix of investments. Sponsors are limited to three investment types — balanced funds, lifestyle or targeted funds, and managed accounts. “If an employee is defaulted into one of these investments, there is greater potential investment growth, and they have someone managing their money for them,” says Robyn Credico, national director of defined-contribution consulting at Watson Wyatt Worldwide.
Regardless of where a company channels employees’ funds, more companies seem interested in default enrollment. At Land O’Lakes Inc., a $10 billion dairy and agricultural cooperative, participation has gone from 70 percent to 93 percent, according to Bob Tomaschko, director of compensation, retirement, and human-resources management systems. The company enrolls employees at 5 percent of their salaries in order to receive the company’s maximum 4 percent match. The goal, Tomaschko says, was not simply to provide the maximum match, but to “help employees achieve the required savings rates in order to have the income they will need at retirement.”
Russ Banham is a contributing editor of CFO.