People are flawed, except for saints and Popes. One of my many flaws is that I enjoy being right. I love predicting things and being right (such as the end of revenue sharing, and a former employer going out of business within 5 years by closing up within 2). But I will admit when I’m dead wrong (Apple opening up their stores wasn’t a bad idea and Amazon could sell stuff beyond books, CDs, and DVDs). One thing I was right about was automatic enrollment.
When I first heard of automatic enrollment, it was called a negative election and it was only recognized through some Internal Revenue Service guidance to a specific plan sponsor in around 1999. I hated it and the reason I hated it was because I saw it as something out of the Communist Soviet Union (I was an old red baiter). The negative election was a gimmick for a plan sponsor to goose up their deferral rates for non-highly compensated employees because the guidance and zero fiduciary protection because the 401(k) plan was an ERISA 404(c) plan meant that any negative election money was doomed to cash or stable value since the participant never directed their investments. My view of the negative election changed with the implementation of automatic enrollment in the Internal Revenue Code as part of the Pension Protection Act of 2006. I felt that the reliance on a Qualified Default Investment Alternative for fiduciary protection meant that participants automatically enrolled could have an account balance that just wouldn’t sit in cash or cash equivalent. As a highly opinionated ERISA attorney for a producing third-party administrator (TPA), I reached out to my bosses and some of the other decision-makers on why we should let our clients know why auto-enrollment was important. I felt it was an effective way to increase participation and to increase assets under management. I jokingly say that until this day, I never received a response to my email.
Studies have consistently shown that adding automatic enrollment to the plan increases participation in the plan and increases the retirement savings of plan participants. It’s more than a gimmick to help with testing, it’s an effective way to get employees involved in saving for retirement that they never would have done on their own.