The use of automatic features, most commonly auto-enroll, auto-reenroll, auto escalation, and default investment options, currently dominated by target date funds, is gaining significant traction in the marketplace. These features are a company’s most powerful tools in changing behavior and putting more employees on a path to financial wellness. Anxieties about overstepping into making financial decisions for employees such as how much to defer into a retirement account are waning. Employees expect and welcome guidance in these matters and employers are recognizing that.
I recently facilitated a webinar with The CFO Alliance on the topic of The CFO's Responsibility in Retirement Planning. I asked if our webinar participants if they utilize automatic features and below is the response that I received. Over 60% of participants utilized automatic features.
A word of caution: Ensure that you run scenarios clearly showing the impact of auto features on items such as the company’s match. For example, we recently conducted a re-enroll for a company with about 65% participation in the 401(k) – 6 months after executing, participation remains at 95% thus greatly increasing the number of employees receiving matching contributions. This increase in investment from the company in its workforce has been substantial but it was expected due to proper planning and diligence. Don’t underestimate the power of inertia – few employees will opt out of automatic plan design.
A word on target date funds: Current fiduciary standards demand a documented process on the selection of investments. The most common mistakes that we see in the target date arena is a failure to understand the unique characteristics of how the mix of investments across various fund families changes over time for an employee and a tendency of some investment committees to concentrate solely on cost. A target date series that is designed to get an employee ‘to’ retirement will perform and behave very differently from a series designed to get on employee ‘through’ retirement. Fees matter…a lot; however, it is the annual return net of fees that will drive results so selecting the lowest cost investment option does not check the fiduciary box if that investment underperforms over the long term.
If you missed our webinar, click here to view the recording. If you have any questions about the use of automatic features or the CFO's responsibility in retirement planning, I can be reached at firstname.lastname@example.org.