Taking Auto Programs to 3D
For most of us in the retirement industry, our biggest wish for the new year is for more people to save more money for retirement. We know one of the best ways to make this happen is through automatic program features. The good news is that more and more employers of all types and sizes are adopting them. The bad news is that many employers have stopped, at what I call, the first dimension.
Dimension 1: The Beginning
Offering automatic enrollment at a fairly low default savings rate for new hires only. By only embracing the first dimension, automatic programs have been shown to fall short of their potential.
We encourage the retirement industry to make a resolution to help plan sponsors embrace two additional dimensions necessary to optimize the value of these automatic programs in improving retirement savings.
Dimension 2: The Combination
Using a combination of automatic features is generally acknowledged for making automatic programs more successful. But, different retirement services providers have had different approaches and different levels of success in helping their clients adopt the five techniques below in the right combination for the plans they serve:
- Install an automatic increase program on an opt-out basis.
- Align employer contribution formulas to maximize employee savings.
- Increase the default savings rate to help employees maximize their employer contributions.
- Complete an automatic enrollment for all eligible employees at the new savings default rate, along with automatic enrollment into the automatic increase program.
- Automatically map non-diversified employee portfolios into the plan’s QDIA.
Dimension 3: The Personal Consumer
Increasing personalization within the auto-feature design itself, coupled with highly-personalized consumer-based engagement strategies. In our recent research, The New Normal, we discuss how leading providers are re-engineering their approaches to automatic program design by creating defaults for various automatic features tailored to individual employee characteristics.
These firms are also using personalized, automated participant engagement tactics akin to those widely used in the consumer market to relate to individual participants. While these approaches can clearly improve outcomes and elevate the next generation of automatic programs, implementation can be extremely complex given the legacy challenges facing recordkeepers today. But, we see certain leading providers rising to the occasion, and putting in place all the necessary transformation to reliably offer these services in a consistent, repeatable, and cost-effective way.
With these three dimensions working together – more plan sponsors implementing auto features in the right combination, and more retirement firms personalizing auto feature delivery – we have the makings for materially improving America’s retirement outcomes.