Quantcast
The MFWire
Manage Email Alerts | Sponsorships | About MFWire | Who We Are

Subscribe to MFWire.com's News Alerts [click]

Rating:What Are Auto 401k Plans About? Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, July 14, 2005

What Are Auto 401k Plans About?

Reported by Sean Hanna, Editor in Chief

Joint research from EBRI and the ICI supports the industry wide belief that automatic enrollment in 401(k) plans would lead to significantly higher plan balances. The concept of "auto-plans, which includes auto-enrollment along with auto-investing through asset allocation funds and auto-increases for deferrals has swept the industry in recent months as providers and plan sponsors seek ways to encourage workers to use plans.

The idea has also caught the attention of lawmakers. A number of bills have been introduced in Congress that promise to encourage the use of the plans. If this kind of plan design catches on, it could be a good thing, according to the research.

The Employee Benefit Research Institute (EBRI) is a nonpartisan, Washington research organization. The Investment Company Institute (ICI) is the trade and lobbying group representing the mutual fund industry.

The EBRI/ICI research found that not only would auto-enrolling increase 401(k) account balances, but that lower-income individuals would benefit the most. Under auto-enrollment, often called "negative elections" by plan sponsors, all workers are enrolled in the plan when they become eligible. Those that wish to stop contributing must inform the plan sponsor or the recordkeeper.

There are some rough edges for these plans, however. Some sponsors have been discouraged from using the feature because they are afraid they would run afoul of some state laws that prohibit employers from withholding from worker paychecks without permission. The widespread view, however, is that ERISA permits the plan design and that ERISA preempts these laws.

The legislation now in front of Congress would clarify this point.

Some sponsors are also concerned that auto-enrollment raises plan expenses by creating numerous small balance accounts. This happens when workers opt out of the plan only after they have had funds withheld from their paychecks.

Legislation would fix this problem by allowing the small accounts to be cashed out without penalty. Currently participants who cash out those small accounts face a 10 percent penalty.

These accounts also raise some fiduciary concerns. Foremost is the need for the plan sponsor to designate a default investment option for those workers accounts (since the workers are auto enrolled, they may not have chosen an investment mix on their own).

To fix this problem, a number of industry lobbying groups are seeking a safe harbor provision to be included in any legislation encouraging the accounts.

Another issue is the default contribution (or deferral) that the plan uses. Many sponsors set that default at the same level as their maximum match or less. Typically, sponsors match up to six percent of pay. Setting a default level that is too low can undermine the success of the plan, as many participants do not change their contribution level once it is set.

The EBRI/ICI research confirmed the importance of the default contribution rate.

"The effects of automatic enrollment on [income] replacement rates at retirement depend heavily on the default contribution rate and default investment option that the plan sponsor selects," the study says. "Everything else being equal, the higher the default contribution, the higher the replacement rates at retirement."

The research also found that automatic enrollment has the greatest impact on lower-income workers. That group is least likely to participate in a 401(k) plan on their own, so the feature gets them into the plan. For workers 2635, the median salary replacement from 401(k) accumulations would more than double from 23 percent without automatic enrollment to 52 percent of salary when the default contribution rate is 6 percent of salary invested in a life cycle fund, according to the study.  

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE

0.0
 Do You Recommend This Story?



GO TO: MFWire
Return to Top
 News Archives
2021: Q4Q3Q2Q1
2020: Q4Q3Q2Q1
2019: Q4Q3Q2Q1
2018: Q4Q3Q2Q1
2017: Q4Q3Q2Q1
2016: Q4Q3Q2Q1
2015: Q4Q3Q2Q1
2014: Q4Q3Q2Q1
2013: Q4Q3Q2Q1
2012: Q4Q3Q2Q1
2011: Q4Q3Q2Q1
2010: Q4Q3Q2Q1
2009: Q4Q3Q2Q1
2008: Q4Q3Q2Q1
2007: Q4Q3Q2Q1
2006: Q4Q3Q2Q1
2005: Q4Q3Q2Q1
2004: Q4Q3Q2Q1
2003: Q4Q3Q2Q1
2002: Q4Q3Q2Q1
 Subscribe via RSS:
Raw XML
Add to My Yahoo!
follow us in feedly




©All rights reserved to InvestmentWires, Inc. 1997-2021
14 Wall Street | 20th Floor | New York, NY 10005 | P: 212-331-8968 | F: 212-331-8998
Privacy Policy :: Terms of Use