When I was at college, I was very involved politically. Someone I met my freshman year at Stony Brook and a friend to this day was someone I met through these political circles and has made a name for himself as a state party chairman and candidate for Lieutenant Governor in California. One of his pearls of wisdom is “Get Them In Early and Get Them Involved.”
When I started out as an ERISA attorney, I first heard of automatic enrollment in 401(k) plans when it was known as a negative election. Pre-Pension Protection Act of 2006 (PPA), employers could only put that money from participants who were negatively enrolled in some sort of stable investment because there was no QDIA or any relief from liability under ERISA 404(c). Taking money from employees without their consent was something out of the Soviet Union.
After I got older and became less of a red baiter, I finally understood why automatic enrollment can be a good thing after PPA. PPA offered some sort of relief to the employers for liability with QDIA, so participants would be automatically enrolled in a fund that was better than a money market fund. The fact of the matter is that when it comes to 401(k) plans, younger participants don’t defer as much as older participants and if something is not done within the next 20 years, I think you will actually see a negative outflow from 401(k) plans. So I think automatic enrollment can be a tool to increase the size of plan assets, prevent negative outflows, and get young participants in early. I think if a plan’s financial advisor gives good investment education with one on one meetings, I think it is possible to get these automatically enrolled participants involved by eventually getting them interested in retirement savings, which will get them to affirmatively enroll in the Plan by increasing their deferral rate from that automatic amount. Get them in early and get them involved, automatic enrollment can be that hook.
When I was working for a producing TPA, I suggested that they push automatic enrollment because it would increase plan asset size (which would increase their revenue) and prevent that retirement crisis I see when baby boomers start pulling money out of 401(k) plans, faster than when Generation X and Y participants put money in. Of course, my opinion was ignored. The argument is that employers don’t want the hassle of employees complaining after they were automatically enrolled. I think that employers don’t like the idea of automatic enrollment because they don’t see the benefits of an increased deferral rate for non-highly compensated employees, increased plan size, and adding a benefit to employees who may not be aware of that benefit.
If I was a financial advisor and I got a fee based on plan assets and I wanted to tout my education capabilities, I’d always broach the subject of automatic enrollment. It’s not for every employer, but it should always be a topic for conversation.
