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Thin(k) About Your 401(k) Plan To Opt-Out or To Opt-In – 401(k) Plan Autopilot Design

Plan Sponsors are increasingly adopting automatic enrollment features for employees that flip the decision process and the results are impressive!  Vanguard’s recently release report, How America Saves 2020 indicates that as of 2019, 50% percent of the firm’s 401(k) and 403(b) Plans that allow employees to save their own money have adopted some feature of automatic enrollment, and many of these plans are going all the way to an auto pilot plan design.

The study also noted that, “Eligible employees hired under an automatic enrollment feature save more.  They have an average total contribution rate of 10.3%, which is more than 50% higher than the rate of 6.6% for employees hired under voluntary enrollment.”

Source: How America Saves 2020

Plans that provide for automatic enrollment require the employee to opt-out of saving for retirement rather than opting-in.  In other words, all eligible employees are automatically enrolled at a pre-determined savings rate unless they indicate otherwise.  Further, Vanguard pointed out that, “Among plans automatically enrolling employees, two-thirds were using all three features of an autopilot design.”

Here are the features:

  1. Employees are automatically enrolled,
  2. Saving rates are automatically increased each year and
  3. The employee’s assets are invested in a balanced fund, often a Target Date Fund.

One problem for adopting an autopilot plan design is that it only impacts newly eligible employees.  However, some plans are implementing automatic enrollment for all eligible nonparticipating workers.  This allows the employer to apply the opt-out decision to all employees.

Feelings about auto enrollment differ amongst employers.  Some feel the plan design overreaches, while others feel it makes things easier for employees, especially if the investments are in balanced funds designed for long-term management.  Regardless, adopting some version of auto enrollment is trending upwards.

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