Key questions (and answers) for Plan Sponsors

Q: Is there a relationship between automatic enrollment and employer decisions about matching contributions and total compensation?

A: Recent research by the Center for Retirement Research at Boston College (CRR) found that auto-enrollment is related to relatively low employer match rates and default rates, but not overall compensation. The How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation? report indicates that auto-enrollment plans had a matching rate of about 0.4 percentage points less than plans without auto-enrollment, even taking into account other factors.

The researchers also investigated whether low-default contribution rates adopted by employers who have auto-enrollment in their plans. It appears that employers who have this feature may be using a relatively low default rate, with resulting lower matching, to offset the higher costs that occur from higher participation rates found in auto-enrollment plans. 
The study concluded that auto-enrollment increases saving for workers who would not have participated in the plan without that provision. However, employees who would have participated in the absence of auto-enrollment may, over time, save less because of relatively low employer match rates.

Q: What’s the latest on employee preparedness for retirement?

A: Financial Finesse’s third annual report on overall retirement preparedness showed small but steady improvement since 2011. However, most employees have done little to prepare. For example, 61% of survey respondents stated that they have not projected their retirement income with a financial calculator. The report speculates that improved market performance and changes that participants had been making in their investment approach have had more to do with employees’ improved retirement preparedness than adjustments in their saving behavior.

Only one-third of lower-income employees had performed a retirement income projection, and only 10% had confidence in their ability to achieve their income-replacement target. Similarly, just 17% of women and the same percentage of the youngest group of workers expressed confidence in being able to reach their income-replacement goal.

Q: What are ideas we can consider to reduce the negative effect on retirement savings resulting from loan defaults upon termination of employment?

A: A recent Aon Hewitt report, Minimizing Defined Contribution Plan Loan Leakage, recommends several preventive steps that plan sponsors can take to reduce the number and dollar amount of loan defaults. First, sponsors can add an option allowing borrowers to make loan repayments from their personal bank account, known as a direct debit repayment option.

Plans with this feature report 22% fewer defaults than those that don’t offer this choice. Reducing the number of loans that participants can have outstanding at one time is another preventive measure. Research shows that plans allowing two or more loans at the same time report loan balances of $1,600 more on average than plans allowing only one at a time.

Money available for borrowing could be limited to employee contributions. Plans with this restriction indicate that average loan balances are $370 less than those that permit borrowing employer match money as well as participant contributions.

Lastly, Aon Hewitt’s white paper notes that the most effective step to reduce leakage from defaults is to have higher loan-origination fees. Plans that charged $100 or more had an average of $4,600 less in outstanding loan balances than those with fees of $50 or less.

FM International Services (NY), Ltd. provides a wide range of retirement services featuring customized benefit plans, flexible investment options, and centralized pension administration. Through FMi’s countless services, businesses of all sizes create unique domestic and international retirement plans for two employees or two thousand – with a single provider handling
conversion, setup, and administration.

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