Auto 401k, Where Is It Going And What Impact Is Is Having?

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Presentation by: Michael Herndon – AARP

Automatic 401(k)s: Where is it Going, What Impact is it Having?

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Today’s Topics

Who is Retirement Made Simpler? What is an Automatic 401(k) Plan? Plan Sponsor Trends and Research Plan Participant Trends and Research Putting it all together: Case Study

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www.Retirementmadesimpler.org

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What Is An Automatic 401(k)?

Uses inertia in a POSITIVE way by setting defaults to:◦ Participating in plan◦ Likely appropriate investments◦ Satisfactory deferral rates

Always leaves decisions up to employees

Proven effective by behavior finance studies

Affirmed by employee surveys

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What Is An Automatic 401(k)?

Support at the highest levels – “We know that automatic enrollment has made a big difference in participation rates by making it simpler for workers to save and that’s why we’re going to expand it to more people.”

President Barack Obama

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Plan Sponsor Trends and Research

Automatic Enrollment Adoption among Employersby Plan Size

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1-49 1.40% 2.00% 3.50% 1.50% 1.10% 0.90% 3.50% 6.80% 11.10% 15.80%

50-199 0.80% 2.40% 2.80% 3.20% 2.10% 3.40% 8.10% 10.30% 24.70% 22.40%

200-999 0.70% 6.50% 6.60% 6.30% 9.30% 9.80% 19.10% 30.50% 40.00% 44.30%

1000-4999 7.40% 13.90% 14.60% 12.40% 16.10% 18.20% 23.90% 31.30% 48.40% 54.20%

5000+ 17.30% 19.80% 17.00% 24.10% 24.20% 30.60% 34.30% 41.30% 53.20% 56.30%

All Plan 4.20% 8.10% 9.10% 7.40% 8.40% 10.50% 16.90% 23.60% 35.60% 39.60%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source, PSCA 52nd Annual Survey, September, 2009

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‘Fidelity Record Kept Data: Corporate DC Qualified Auto Features Plans,’ December, 2008

Growth in Percent of Plans Having Adopted Automatic Enrollment by Plan Size

2800%

640%327% 247% 185% 135% 204%

0%

500%

1000%

1500%

2000%

2500%

3000%

151-500 501-1,000 1,001-2,500

2,501-5,000

5,001-10,000

10,001-25,001

25,000+

2006-2008

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Vanguard 2008 “How America Saves:”◦ Quadrupling of automatic enrollment in client

plans since 2005◦ One-third of total participant population has

automatic enrollment◦ Of those, two-thirds now feature automatic

annual increases in savings rates, up from one-third in 2005

◦ Auto-enroll plans had an overall participation rate of 84% in 2008 compared with 60% for plans with voluntary enrollment

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2008 Percent of Plans with Automatic Enrollment by Plan Size

5.3%

14.6%

31.7%36.8%

41.5%

26.1%

5.8%10.1% 8.3%

11.6% 11.7%9.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1-49 50-199 200-999 1000-4999 5000+ All Plans

For new hires For all non-participants

Source, PSCA 52nd Annual Survey, September, 2009

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‘10th Annual Transamerica Retirement Survey,’ April, 2009

Small Company Reasons for Not Adopting Automatic Enrollment

35% 33%

9%14%15% 14%

8% 8%4% 6%4% 4%

0%

10%

20%

30%

40%

2007 2009

Participation is already high Concerned about costs

Allow employees to choose Employees not interested

Concerned about administrative complexity Concerned about current regulations

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‘10th Annual Transamerica Retirement Survey,’ April, 2009

Large Company Reasons for Not Adopting Automatic Enrollment

22% 23%

15%

21%

8% 9%5% 6%

20%

13%

6% 6%

0%

5%

10%

15%

20%

25%

2007 2009

Participation is already high Concerned about costs

Allow employees to choose Employees not interested

Concerned about administrative complexity Concerned about current regulations

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Plan Participant Trends and Research

“New employees hired under automatic enrollment designs have participation rates dramatically higher than employees hired under voluntary enrollment designs (86% vs 45%).”

—“Measuring the Effectiveness of Automatic Enrollment,” Vanguard Center for Retirement Research

Particularly beneficial for those least likely to participate in a 401(k) plan: women, minorities, and low-income workers.

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Retirement Made Simpler commissioned a study of Americans conducted by Porter Novelli’s annual ConsumerStyles® survey and found:◦ Consumers’ attitudes

towards automatic 401(k) features softened from 2008 to 2009 indicating less certainty among workers.

◦ Employees automatically enrolled in a 401(k) still are overwhelmingly positive about them.

Automatic Enrollment

Employed AdultsWere Automatically

Enrolled

2008 2009 2008 2009

Positive (Net)

77% 69% 92% 88%

Very 33% 26% 54% 44%

Somewhat

44% 43% 38% 44%

Negative

(Net)

23% 31% 8% 11%

Very 5% 9% 1% 1%

Somewhat

18% 22% 7% 10%

Specific question asked: Generally speaking, how do you feel about a 401(k) plan that automatically enrolls employees unless an employee chooses to opt out?

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◦ Automatic escalation remains popular although with greater uncertainty

Automatic Escalation

Employed Adults Enrolled in Automatic Escalation

2008 2009 2008 2009

Positive (Net) 65% 57% 91% 87%

Very 23% 18% 60% 40%

Somewhat 42% 39% 31% 47%

Negative (Net) 35% 43% 8% 13%

Very 9% 15% 1% 2%

Somewhat 26% 28% 7% 11%

Specific question asked: Generally speaking, how do you feel about automatic escalation of 401(k) contributions, where, for example, a company would automatically increase an employee’s contribution to their 401(k) account for 1% each year?

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◦ Employees reported much less loyalty due to employers offering retirement benefits in 2009 than 2008.

Agreement with Statement

I feel more loyal to my company when they help me to save for my retirement

All Employed

Adults

Employed Adults Whose

Companies Offer a 401(k)

Plan

Participate in a 401(k)

Plan

Were Automatically

Enrolled

Enrolled in Automatic Escalation

200949% 49% 53% 50% 53%

2008 53% 53% 59% 62% 68%

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Plan Participant Trends and ResearchParticipation Rate by Income 2000-2008

0

20

40

60

80

100

<$30,000 $30,000–$49,999 $50,000–$74,999 $75,000–$99,999 $100,000+

Income

Per

cen

tag

e

2000 2001 2002 2003 2004 2005 2006 2007 2008

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Participation Rate by Age 2000-2008

0

20

40

60

80

<25 25–34 35–44 45–54 55–64 65+

Age Group

Pe

rce

nta

ge

2000 2001 2002 2003 2004 2005 2006 2007 2008

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Investor Education Automation should be

accompanied by EDUCATION.

More employees are apt to be engaged in the message because they have money invested

Challenge them: Are you saving enough?

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Investor Education Personalize

◦Participation status◦income level◦primary language

Provide resources and tools

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Putting It All Together: Company Success Story

2003: Company worked with provider with experience implementing auto 401(k)s

2004: Auto-enroll all new non-union employees

2006: Educated eligible employees who weren’t participating◦ Mailed letters detailing the automatic 401(k)

process.◦ Enrolled at a 4% (to take advantage of full

company match) in a lifecycle fund

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Union Workers Evraz negotiated through their

bargaining unit Union accepted an automatic 401(k)

plan as long as it included an opt-out feature.

Set the savings rate at two percent with a one percent match.

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Results: Participation grew substantially

◦ From 50% to 97% for non-union◦ From 40% to 70% for union workers

Employee feedback overwhelmingly positive

Administration costs remained the same as pre-automatic enrollment days

Economy & Finance

Auto 401k, Where Is It Going And What Impact Is Is Having?