What is Automatic Enrollment and What Are The Benefits?
As we move further in to the 21st century, the responsibility of saving for retirement has fallen almost squarely on the shoulders of plan participants (employees). With defined benefit pensions plans offering a lifetime stream of income no longer the norm and the increasingly uncertain state of our country’s Social Security system, employer-sponsored retirement plans are the primary savings vehicle for most American workers. It is important for employees to start saving early to allow contributions to grow and compound over time. Employers that sponsor retirement plans have the ability to set their employees on a secure path to retirement early on.
The way employers can promote saving is by implementing an “automatic enrollment” feature, which has become an increasingly popular trend in the retirement plan industry. Participants are automatically enrolled in the plan at a default contribution percentage, usually between 3%-6%. The investment election is also pre-determined, which simplifies the enrollment process for the employee. Industry studies have shown that plan participation rates tend to increase with automatic enrollment, with an increased number of employees voluntarily increasing their contributions year over year. If a participant chooses not to participate, they will have the option to opt out.
Plans can also implement an “automatic escalation” feature that will automatically increase a participant’s contribution rate every year. This eliminates the requirement of the participant calling or going online to change their contribution election. The increase will stay in place unless the participant chooses to opt out, which they are able to do at any time.
The automatic enrollment and automatic escalation feature can be very helpful in setting plan participants on the path to a secure retirement. The earlier a participant starts contributing and the more they contribute over time, the more potential savings they will have at retirement. To ask about setting up automatic enrollment or automatic escalation, please contact your Account Relationship Manager today!