Case study: Automatic enrollment with auto increase, re-enrollment, and fee equalization

The challenge

A Milliman client sponsors a safe harbor designed defined contribution plan with an enhanced match of 100% up to 4% of pay. But participation in the plan was lagging at 60% and the savings rates among the non-highly compensated employees who were participating was less than 5%. The retirement committee, which consisted of senior level individuals, had a passion for wanting to make the company a great place to work and a great place to be able to retire from. They already had one of the best, if not the best, healthcare plans and wanted the same recognition for their retirement plan.

In 2014, the committee decided to tackle the issue of low participation and low savings rates and put into action design elements and procedural policies to improve the financial well-being of their valued employees. Their goal was simple–to get all participants saving in the plan at least 10% of pay, so that with the employer match, everyone was saving at least 14% per year. Milliman assisted in the goal setting by projecting employees’ retirement readiness, assuming they retired at age 65 and are able to replace at least 80% of their pre-retirement income.

The client took these actions without changing their safe harbor design. As they stated at the time, “The Plan is there for everyone to take advantage of. Cost should not be a concern. We want our employees to benefit from this-and we are going to help them do it.”

The solution

During our discovery meetings with them and their independent adviser, we discussed communication and education through print, electronic, and in person meetings. However, we felt the best results would be achieved through plan design changes supporting the goals the committee wanted to achieve. Milliman recommended a few strategies to help drive these results. The first was to loosen the eligibility rules and pursue re-enrollment for all non-savers in the plan. The second was to implement a recurring annual auto-increase feature to boost anyone saving less than 10%. The third was to promote a low-cost saving environment reviewing all fund expense options and implementing a fee equalization policy to share in the plan-related costs. Lastly, we focused on investment diversification by using the plan’s default, which is a custom glide path using our Investmap™ solution. With the help of Milliman’s guidance and expertise, the committee and their independent investment adviser agreed and implemented the following:

• Reduced the eligibility period from 90 days to 30 days
• Added an auto-enrollment feature consisting of a 2% default deferral with a 1% auto increase up to 10% annually for new hires (We initially suggested a default rate of 6%, but the client was skeptical of the retention at this level.)
• Re-enrolled all active and eligible employees deferring 0% at a 2% deferral rate with a 1% increase to 10%
• Identified the lowest net expense share class of all investments within the plan
• Rebated any revenue sharing back to the individual investors who accrue it
• Implemented a fee equalization policy where the client would pay half of the plan's related expenses attributable to recordkeeping, trustee, and investment advisory work
• Implemented an equitable fee allocation of remaining expenses by combining a pro rata and a per capita budgeted allocation to assist in paying the remaining fees
• Agreed to revisit the fee allocation budget every quarter to maintain consistency and to adjust for any changes or shifts in demographics that may affect the amount being collected

Outcome

To review the success of this effort, we agreed to look at two windows of time. The first was to review the immediate impact within the first three months of this action taking place. The second was to perform an annual review each year going forward. We found:

• Re-enrollment effectively enrolled 93% of those who had not been deferring.
• Of those re-enrolled, 16% elected a rate higher than the default of 2%.
• Plan participation went from roughly 60% to over 96%.
• Plan participation three years later remains over 94%.
• The average number of funds being used per participant rose from eight to 11.2 (there are 15 available options) and has remained consistent at that level.
• The average deferral rate for the plan initially decreased to 5%, but two years later the auto increase has helped to bring this to roughly 6% (and climbing).
• The average weighted expense ratio of plan investments went from .65% to .37% and has remained steady at this low rate.

This case study demonstrates that auto features in defined contribution plans effectively increase participation and retirement savings for individuals—and not just initially, but on an ongoing basis. In addition, continued monitoring and due diligence along with the transparency of fees are important factors in decision-making and in helping committees come to the conclusion as to what is fair and equitable.