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 your employees and make your life easier, especially if you’re an HR director trying to get people to enroll in their retirement plans.
So what exactly is Auto to the 5th Power?
It’s actually a series of automatic features that you can use in your retirement plan to get your employees engaged in their retirement plans. This means getting them enrolled, getting them to increase their savings, and also providing greater protection for you as a plan sponsor.
Today we’ll be taking a look at the top two automatic features. I’ll show you why they are so beneficial and how you can put them into action.
The first feature is automatic enrollment, which is one of the easiest ways to save time, money, and effort. Instead of sending out a retirement form to your employees that may or may not ever be returned, all you need to do is send out a 30-day notice to your 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 your match is 50% on 6% you might want to set that contribution rate at 6%. The government will allow you to go as low as 3%, so that is an option if you’re worried about taking too much out of your employees’ paychecks right away.
We personally always recommend setting the contribution rate at whatever the match rate is. After all, the name of the game is getting people to save for retirement, and people usually need to save about 10% a year.
Now, you’re probably not going to automatically enroll at 10%, but the key to automatic enrollment is in the 30-day notice. You’re covered because you gave your employees notice, and your employees have the option to opt out. However, 70% of people 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 option. Say you automatically enroll an employee into the retirement plan but they don’t pick their investments. What’s a plan sponsor to do? Under the Pension Protection Act, you can automatically enroll them into something called the Qualified Default Investment Option. 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. You have to send them something that tells them if they don’t make an election, you’re going to make the election for them. Provided you do investment due diligence on that investment option and document that you are monitoring that investment, you’ll be protected under the Pension Protection Act, which means you can’t be sued for making that investment choice for your employee.
The bottom line is, using automatic features is easy, convenient, faster, and cheaper. Also, if you do your due diligence, you are completely protected thanks to the Pension Protection Act. In the end, your employee is the person who 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 give me a call. Additionally, if you’d like an analysis of your retirement plan, you can reach out to Matt Gilmore in my office by sending him an email or giving him a call as well. We’d be happy to help!