Today I’m going to be talking about something I like to call Auto to the 5th Power. This is a way that you can use technology to automate savings for employees and make life easier, especially if an HR director is trying to get employees to enroll in their retirement plans.
So what exactly is Auto to the 5th Power?
It’s actually a series of automatic plan features that can be used to get employees engaged in their retirement plans. This means getting them enrolled, getting them to increase their savings, and also providing greater protection for the plan sponsor.
Today we’ll be looking at the top two automatic features. I’ll show you why these features are so beneficial and how they can be put into action.
The first feature is Automatic Enrollment, which is one of the easiest ways for a plan sponsor to save time, money, and effort. Instead of sending out a retirement form to employees, that may or may not ever be returned, all that needs to be done is to send out a 30-day notice to employees notifying them that when they are eligible for the retirement plan, they will automatically be enrolled in the plan at a set rate.
For example, if the plan sponsor’s match is 50% on 6%, the plan sponsor may want to set that contribution rate at 6%. The government will allow plan sponsors to go as low as 3%, so that is an option if the plan sponsor is worried about taking too much out of his employees’ paychecks right away.
Personally, we always recommend setting the contribution rate to the match rate.After all, the name of the game is getting employees to save for retirement, and they usually need to save about 10% a year.
Now, a plan sponsor is probably not going to automatically enroll an employee at 10%, but the key to automatic enrollment is in the 30-day notice. The plan sponsor is covered because they gave the employees notice, and the employees have the option to opt out. However, 70% of employees who are automatically enrolled in the plan stay in the plan.
The second feature is called Automatic QDIA. A QDIA is a “qualified default investment alternative”. Say an employee is automatically enrolled into the retirement plan but they don’t pick their investments, what’s a plan sponsor to do? Under the Pension Protection Act, a plan sponsor can automatically enroll the employee into something called the Qualified Default Investment Alternative. Typically, a QDIA is going to be some sort of lifestyle fund, but it could be a customized option based on the employee’s age.
As with automatic enrollment, the key to the QDIA is all about the notice. The plan sponsor must send the employee something that tells them if they don’t make an election, the plan manager will make the election for them. This assumes that the plan sponsor does their investment due diligence on that investment option and documents that the plan sponsor is monitoring that investment; the plan sponsor is protected under the Pension Protection Act, which means that the plan sponsor can’t be sued for making that investment choice for the employee.
The bottom line is, using automatic features is easy, convenient, faster, and cheaper. Also, if the plan sponsor does their due diligence, they are completely protected thanks to the Pension Protection Act. In the end, the employee wins, as they are saving money to create that paycheck for life.
If you have any questions, please feel free to send me an email or you can reach out to Marie Forest in my office by sending her an email or giving her a call as well. We’d be happy to help!