Strategies to Overcome Objections to Auto Plans - Elizabeth Kaido

B P A S P A R T N E R C O N F E R E N C E 2 0 1 6

BPAS PARTNER CONFERENCE 2016

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Strategies to Overcome Objections to Auto Plans Elizabeth KaidoSenior Sales Relationship Manager


2016 BPAS Partner Conference

What Are They?

Auto-enrollment plan: participants who have not made an election will be automatically enrolled in the plan at the initial

default rate

Participants have the option to opt out at any time and may also have the ability to withdrawal any deferrals within a 90-day window

Deferrals are invested into the plan’s default fund, mostly likely a

fund or series of funds that qualify as a QDIA (target date

series, balanced fund, etc.)

Auto-escalation: feature that increases the deferral rate by a set percentage annually until

participants reach cap

Re-enrollment sweep: periodically sweeping participants that were not initially included in auto enroll, previously elected to

defer below the default percentage, or who have opted

out


“45% of Americans have saved exactly nothing—zero, zip,

nada—toward retirement”1

“Just 22% of workers are very

confident they will have enough

money in retirement”1

“Only 45% of Americans are on

track to live comfortably in retirement”1

“In two thirds of working

households with earners between ages 55 and 64

years, at least one earner has saved less than 1 year’s

income for retirement”2

“Only 1 in 6 employers offer retiree health

insurance”1

Why Do We Need Them?

1:BenefitsPro “10 scary retirement statistics :Stay calm and start planning” by Marlene Y. Satter2:How prepared are Americans for retirement: Written testimony to the Special Committee on Aging, Michal Grinstein-Weiss, Non-resident Senior Fellow, Brookings Institute (March 2015)


Why Do We Need Them?Projected Median Income

Replacement by Generation1

82%Early Boomers

60%

50%

Late Boomers

Gen-Xers

4 in 10 think they’ll need less than $500,000 in total

retirement savings

$1M in retirement savings only $40,000 of annual income

Unrealistic Expectations2

1: T. Rowe Price, “Price Perspective November 2015”2: Bank of America “2016 Workplace Benefits Report”


Are They Effective?

Voluntary As reported by Plan Sponsors Auto-Enrollment51% Participation rates of over 75% 80%

42% Actual savings rates of over 10% (combined plan sponsor and participant contributions)

57%

Average deferral rates have hovered at 7% for the past 7 years

Common 3% default deferral

rate and the lack of escalation have adversely affected

participants

Strategy?High Initial

EscalateIncrease Max

Source: T. Rowe Price, Price Perspective November 2015


Not All Auto Programs Are Created Equal

• Automatic enrollment without automatic escalation is like peanut butter without the jelly1

• Employees become lulled into a false sense of security about their long-term financial health simply because they are putting something away, even if it is insufficient.

1:Small 401(k) Plans Face Low Participation Resistance to auto features comes from both management and employees By Stephen Miller, CEBS2: Vanguard “How America Saves 2015: A report on Vanguard 2014 defined contribution plan data”

Current Deferral/

Participation Rates

Plan Design

Match Formula

Initial Default

Escalation Percent

Periodic re-sweeps


Why Not Then?

Top Sponsor Objections to Auto Plans• Too paternalistic toward employees• Employee backlash– “They can’t afford to save for retirement.” – “My employees are young and don’t care about

saving.”• Too costly• Administrative headache


Too Paternalistic?• 82% of employees are willing to give up a

portion of their salary to secure retirement income

• According to the DCIIA plan sponsor survey, 70% indicate that employees’ attitudes toward automatic enrollment was either very or somewhat favorable.

• A 2012 survey conducted by Cogent Research showed that nearly half (49%) of plan participants report wanting access to auto-escalation features

• Opt-out rates, across a variety of providers, industries and plan size, average less than 10%

Source: Prudential “Overcoming Participant Inertia: Automatic Features That Improve Outcomes While Improving Your Plan’s Bottom Line”


Employee Backlash• Among new hires, participation rates more than

double to 91% under automatic enrollment compared with 42% under voluntary enrollment– After three years, 89% of participants hired under

automatic enrollment were still participating versus 51% of participants under voluntary enrollment who had chosen to join the plan

• Employees earning less than $30,000 had a participation rate of 87% under automatic enrollment versus 22% under voluntary enrollment

• Employees between the ages of 25-34 had a 91% participation rate under automatic enrollment

Source: Vanguard “Automatic Enrollment: The power of default” January 2015


Cost Concerns• Added match costs

– Seen as an extra capital expenditure • Added administrative costs for participants with small balances• However, shouldn’t be viewed as just an expense, but an investment in an

engaged, productive workforce that will be retirement ready• Consider the additional business costs associated with participants that are not

properly prepared for retirement— Experts estimate that the additional cost to employers is between $10,000 and $50,000 per year, per employee, for every year that participants delay their retirement beyond normal retirement age


Strategy

• Stretch the match formula—Participants take cues from their employers:– A 100% up to 5% match signals to participants that they

should be saving only 5% of pay– 50% up to 10% match formula costs the same, but gives your

employees a better signal on appropriate retirement savings

• Who is being auto-enrolled?– Average non-participating employee has a modest salary so

the additional match costs are also modest.

• Match is tax-deductible and often has vesting schedule“Impact of Employee Financial Stress on Health Care Costs” Financial Finesse Reports, 2011.


Administrative Burden• If the plan uses Online Enrollment:

– BPAS tracks the initial entry and annual escalation of participants– BPAS notifies participants they are eligible, how to opt into/out of the

plan online– No more enrollment or beneficiary forms to keep track of (participants

complete all information online through Enrollment Wizard)– All positive and negative elections are captured on a report used to

update deferral rates in payroll• Documented trail for audit purposes• No messy spreadsheets for tracking


Administrative Burden

• Data is retained for future changes to program (i.e., increase auto-escalate cap from 10% to 15%)

• Annual notice required– Included in year-end notice kit provided to sponsor

(QDIA, 404a5, Safe Harbor)


Benefits to Advisor

• Allows advisors to better utilize their time with participants• Combats inertia and gets more participants engaged in the

retirement planning process• Ability focus on financial wellness programs

– Budgeting, home ownership, insurance, health care, college planning and retirement– 70% of plan participants would likely use company sponsored personal financial and

investment services1

• Even if plan sponsors are not interested in implementing now, it is important to place plans with a firm that can accommodate automatic features for when sponsors change their mind

1: Bank of America Merril Lynch “2012 Workplace Benefits Report”


Back Sweeps for Enrollment

Clean up auto-enrollment programs that aren’t effective Raise initial default rate Add automatic escalation Back sweep all groups that were

not initially included in automatic enrollment

Back sweep all participants with a deferral rate below the default

All eligible employees deferring less than the

default rate

All previously eligible employees currently

deferring 0%

Only Newly Eligible

Employees


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Economy & Finance

Strategies to Overcome Objections to Auto Plans - Elizabeth Kaido