401(k) auto features

Steve Danen's message is decidedly blunt: There's nothing like saving easier or saving sooner for the day you retire.

"I wasn't smart enough back then," he said. "I just wish the company would have been smart enough for me."

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Danen is the tax manager for Weather Shield, a window and door manufacturer in Medford, about 35 miles northwest of Wausau. He's worked for the company for 33 years, but it wasn't until five years ago that Weather Shield revised its 401(k) plan to add automatic enrollment, a feature where all employees are enrolled in the 401(k) unless they opt out.

In Weather Shield's case, a default amount of 2 percent is automatically taken from workers' paychecks and put toward retirement savings.

Danen said the switch to automatic enrollment has directly increased employee participation from 59.4 percent to 79.6 percent. Only a small percentage of enrollees, he said, elect not to contribute.

"The participation increase verifies we are achieving our goal of helping employees save for their retirement," Danen said. "Once employees realize that saving 2 percent of their pay for retirement doesn't have much of an impact on their take-home pay, it's easier to convince them to increase their deferral percentage, which is a continuing goal and a large part of our employee education process."

Danen is not alone in his sentiments. More companies across the country are putting their 401(k) plans on "autopilot" ? the retirement industry's pet name for easy savings features like automatic enrollment, automatic escalation of salary contributions and the automation of investment choices.

And while the autopilot trend still isn't apparent in the capital region, financial experts say it's the right time for businesses to consider getting on board.

"Study after study shows that many American workers experience participant inertia and procrastination toward their retirement savings," said Kelli Send, principal with Francis Investment Council LLC in Hartland. "Simply put, we may intend on doing a lot of things, but we find that life gets in the way of accomplishing many of those things."

"Putting retirement plans on autopilot is simply a way of putting this tendency to work," said Send, whose investment firm advises Weather Shield. "Employers adopt these policies to help their workers do what is right: Save for their future, but do so through automatic methods that do not require a high level of participant interest or action."

A survey released this year by Hewitt Associates, a global human resources outsourcing and consulting firm headquartered in Illinois, looked at about 450 large companies and found that nearly 19 percent are using the auto-enrollment feature, up from 14 percent in 2003.

Lori Lucas, director of participant research for Hewitt, said that translates to nearly one in five nationwide companies offering auto-enrollment.

"We've definitely observed (it's a trend) that's increasing," Lucas said. "One of the fundamental reasons is that more and more plan sponsors are using the 401(k) as their only main retirement vehicle."

Lucas said that with the uncertainty surrounding Social Security benefits and the demise of traditional pension plans, more companies are relying on 401(k) plans to get their employees in good shape for retirement ? and that means participation has to increase.

But persuading people to begin saving for retirement early, regardless of the type of plan, is not easy.

According to a study released in July by the nonprofit Employee Benefits Research Institute, 401(k) participation without auto-enrollment depends strongly on age and income, and ranges from a low of 37 percent participation among the young, lowest-income workers who are eligible to a high of 90 percent among the older, highest-income eligible workers.

Before auto-enrollment came along, Danen said getting the youngest, lowest-paid workers at Weather Shield to save was one of his biggest challenges, and the problem coincided with higher-paid workers wanting to put more into their tax-deferred retirement accounts. The situation is a common one that can cause significant problems.

Unless all of a company's employees are contributing to the 401(k) relatively equally, the more highly compensated people (those making upward of $95,000 and getting nearer to retirement) can't contribute more; this obstacle occurs because companies must adhere to non-discrimination rules, which require that a 401(k) plan doesn't favor one subset of workers over another.

According to Barry Gerhart, a UW-Madison professor of management and human resources in the School of Business, the difference can be made up in one of two ways.

"One, increase the contribution levels of most employees or two, decrease the contribution levels of highly compensated employees," Gerhart said. 

"Obviously, given that top executives will be in the highly compensated group, option two does not seem terribly attractive."

Auto-enrollment, then, helps to improve the balance of higher-paid employees close to retirement and young, lower-paid workers who are less likely to contribute to a 401(k).

Danen said adding the auto-enrollment feature addressed both of Weather Shield's main concerns: the desire by the highly compensated workers to save more and the need for its newer, younger employees to start saving.

"Many of our newly eligible employees are young and it's difficult for them to understand the benefit of saving for retirement at an early age," Danen said. "Long-term employees, including myself, lament the fact that we didn't begin saving when initially eligible for the plan."

Deborah Turner, a senior consultant with RSM McGladrey, said companies have no time to waste if they're serious about urging their employees to create a "nest egg." Most 401(k) plans currently operate without any "auto" options, she said, and people who aren't participating now will find they're hurting down the road.

"The 401(k) plan is going to be the most widespread form of retirement plan ... and if employees aren't participating we're going to have so many people not having assets to live off in retirement," said Turner, whose nationwide business services firm consults with companies on retirement plans.

"(Without auto features) an employee has to take an action to make things happen. They have to select how they want their account invested from a variety of mutual funds. If that employee doesn't send back a form, then nothing happens ... they're not getting a company matching contribution. By doing nothing, they're going to have nothing."

Turner said companies should seriously consider autopilot features if they're dealing with the "inertia" that often plagues employees.

"I think that they are slowly becoming more popular," she said of auto-enrollment plans. "I expect them to start to grow rapidly because they address a lot of the problems we have with 401(k) plans as employees and employers."

Dan Stafford, a managing partner for the benefits practice at Virchow Krause & Co. in Madison, agreed.

"I think there's a trend upwardly," Stafford said of the more automated 401(k) plans. "There's an increase in interest and an increase in understanding the ramifications of such a way of doing business.

Doing business ? and doing it smart ? is why one Madison law firm said the auto features have been a successful part of its retirement plan.

Peter Peshek, a lawyer and co-chairman of the savings plan committee at DeWitt Ross & Stevens, said the law firm already has a popular profit-sharing plan, but adding auto-enrollment to their 401(k) plan nearly four years ago was a responsible business move.

"One, it's good for the employer because we have a fringe benefit now that's actively being used by the employees," Peshek said. "And two, it's of good societal value. ... If our (the country's) savings rate is as low as what's being reported, then we have a societal obligation to increase that rate."

Unlike Peshek, benefits analyst Liz Melin of Berbee said she hasn't bought into the purported trend for her employees just yet.

Berbee, an information technology company in Madison, touts a traditional 401(k). The company boasts a nearly 75 percent participation rate, so Melin is taking a wait-and-see approach to automatic features.

"We are continuing to monitor our benefits periodicals for more details on auto-enrollment," Melin said. "We are waiting to see if there will be further government guidance in this area and would also like to hear more about how other companies who have adopted auto-enrollment have fared. Has it increased enrollment as much as anticipated? Has the employee reaction been negative or positive?"

Auto-enrollment isn't the only "auto" feature that's attracting attention.

Auto-escalation, Send said, allows for plan participants to commit to increasing their savings rates at preset intervals.

Send said this feature was developed by behavioral economists Shlomo Benartzi at UCLA and Richard Thaler at the University of Chicago, two professors who did pioneering research in the 1990s on how people could save more for retirement.

"They found a way to make saving more painless because it's automatic and done in small increments. Their study did show this approach clearly works," Send said. "Interestingly, most workers who enrolled did not opt out after only one auto-savings increase. The majority stay in the auto-escalation long enough to experience multiple savings increases."

Auto-investments, Send said, are also becoming popular. Instead of employees choosing from handfuls of funds in which to invest, they can choose from pre-mixed options that the employer offers, or a default investment option. These are often termed "lifecycle" funds and are geared toward employees' risk tolerances where allocations can automatically adjust as the employee ages.

Teri Erdman, vice president of human resources at CUNA Mutual Group in Madison, said that while her company does not offer autopilot options, it is tracking the national trend.

Currently, Erdman said, the company has a typical 401(k) plan that matches 100 percent of the first 5 percent of an employee's salary contribution. It's a plan with nearly 90 percent employee participation, a relatively high level compared with other companies.

"I think we have a very competitive, well-designed plan ... the one thing we are currently considering is another upcoming trend which is adding the lifecycle funds," Erdman said. "We may also look at auto-escalation. ... I think it's a good way to encourage employees to save more throughout their career as they're able. It's a good way to make it easy or make it more encouraging to save because the cost of waiting (to save) is huge."

As retirement closes in, Send said, people begin to realize what it is they need financially to live comfortably ? and that amount is increasing, particularly in light of raising health-care costs and the jump in life expectancy.

Send said when she's asked by clients how much they should have saved at retirement, the answer often shocks them.

Send said she generally recommends that by age 35, the individual should have nearly one year's salary put away; by 50, at least three times; and by age 60, at least six times.

"By retirement, the goal is nine times your current income," Send said. "That provides you with sufficient assets to pull out for about the next 30 years."

So, in the scheme of life, Send said, saving for retirement is critical. "If you don't do it, then imagine living on just half of your current income ? and that would be the best-case scenario."

Putting money away early and in larger amounts, she said, can be accomplished, and if companies want to be part of that push, they should consider automated features.

"From auto-enrollment, auto-savings increases, pre-mixed funds and even professionally managed accounts, the trend is toward providing participants with more help, not less," Send said. "I believe participants don't want to be responsible for the proper management of their financial futures; they want help. These autopilot systems provide that."