401(k) response to be automatic

A strong endorsement of automatic enrollment in the Pension Protection Act is expected to prompt 401(k) plan executives to adopt the feature.

Automatic enrollment is expected to boost the participation rate in 401(k) plans to more than 90%, from about 70% now, according to the Employee Benefit Research Institute, Washington.

Executives at McKesson Corp., URS Corp., Apple Computer Inc. and Crossmark Inc. are keenly eyeing the option.

The new law, signed by President George W. Bush last week, allows defined contribution plan employers to offer automatic enrollment. Plans also will be permitted to hire their DC providers to offer face-to-face investment advice to help employees manage their 401(k) investments.

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Jacalyn Louie, manager of McKesson's $1.5 billion 401(k) plan, said the San Francisco-based company had been considering offering automatic enrollment for the past year, and the new law will help advance that consideration.

"The act does help. It cleared up a lot of the legal issues (like garnishment of wages) we were concerned about," said Ms. Louie. McKesson executives are now strongly considering adding the feature, she said.

Jeff Belfiore, retirement manager for San Francisco-based URS, said he would like the $1.2 billion 401(k) plan to offer automatic enrollment next year. "We've discussed adding it and now the new rules will take away some of the stumbling blocks that have held us back. We're much more likely to implement it now," he said.

Gary Wipfler, vice president and treasurer of Apple Computer in Cupertino, Calif., said officials at the $600 million 401(k) plan are considering automatic enrollment.

Rodger Fisher, vice president of human resources for Crossmark Inc., Plano, Texas, said the new pension law is a positive step in getting more employers to offer automatic enrollment to 401(k) plan participants. Crossmark's $100 million 401(k) plan does not offer automatic enrollment, but officials will strongly consider it now.

Consultants like Michael Weddell, who works in the Southfield, Mich., office of Watson Wyatt Worldwide. also are applauding the DC provisions. "The automatic enrollment and automatic increase provisions are great news," Mr. Weddell said.

In addition to easing concerns on automatic enrollment, the new law also provides safe harbor for employers to automatically increase employee contributions at appropriate intervals. The definition of appropriate is expected to be included in guidance on details of the law to be issued next month by the Department of Labor.

"There will be a lot of movement from plans that don't have auto-enrollment," Mr. Weddell said. "More plan sponsors will look at the law and see that employees will be better off. There will be a lot of discussion in the coming months."

David Wray, president of the Profit Sharing/401(k) Council of America, Chicago agreed: "I think there will be a great deal of interest in auto-enrollment now. The provisions will alleviate issues pertaining to safe harbors and garnishment of wages, he said.

"In our 2004 survey, 10.5% of plans offered automatic enrollment. In 2005, it grew to 16.9%, and you are going to see that number really climb in 2006 and 2007," said Mr. Wray.

Among defined contribution service providers, Jeff Bograd, vice president and managing ERISA consultant for NYLIM Retirement Plan Services, Boston, said: "I have a number of clients that have expressed interest. We have 10% to 15% of clients offering it now and we expect that to double over the next couple of years." NYLIM has 300 plans as clients with a total of $15 billion in assets.

According to Fidelity Investments, Boston, automatic enrollment is one of the most important provisions in the law.

Data gathered by Fidelity show that of the nearly 100,000 employees automatically enrolled into a 401(k) plan last year, 87% remained in the plan throughout the year and 18% increased their deferral rates.

Fidelity also found that participation rates for employees eligible for enrollment in 401(k) programs in 2005 were 22% higher in plans with automatic enrollment, when compared to plans without it. The increase in participation rates was greatest among younger and lower-compensated employees.

Fidelity pulled data from 9 million participants in 12,000 corporate DC plans serviced by the firm at the end of 2005. Fidelity clients account for $445 billion in DC assets.

Automatic enrollment "is a different way of thinking. Plan sponsors used to say: ‘Here's the plan, if you want to enroll that's great, if not, that's your choice.' Now they're seeing that the most bang for your buck is to go the (automatic) route. It's making a difference that Congress clarified this issue," said Mr. Bograd.

Charles Vieth, president of T. Rowe Price Retirement Plan Services Inc., Baltimore, said: "It's very favorable that Congress came out with auto-enrollment and auto-increase guidelines. It's a train that's been under way for some time and we've tried to get out there first. About 35% of our clients use auto-enrollment and it continues to grow." T. Rowe Price has roughly 500 defined contribution clients with a total of $92 billion in assets.

Catherine Collinson, senior vice president of strategic planning for Transamerica Retirement Services, Los Angeles, said, "We expect (automatic enrollment) to take off in a very big way."

About 5% to 10% of Transamerica's clients use automatic enrollment, but Ms. Collison said she expects it to grow considerably in the next few years. The firm has more than 15,000 defined contribution clients with $11.9 billion in assets.

The guidance the Labor Department is to issue next month also is expected to cover the appropriateness of designating default investment options that include a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both.

Industry experts expect asset allocation funds and managed accounts to be picked as appropriate defaults for automatically enrolled employees.

URS Corp.'s Mr. Belfiore said he hopes the guidance does include asset allocation funds as an appropriate default option. "It really should be lifecycle or time-horizon funds. They are the most appropriate. The funds would help those risk-averse employees and those that may be too aggressive."

Robert Hunkeler, vice president of investments for Stamford, Conn.-based International Paper Co.'s $4.4 billion 401(k) plan, said IP already automatically enrolls employees into the plan, but executives there now will look at changing the default option. IP defaults employees into a stable value fund, but officials are considering changing that to an appropriate asset allocation fund, he said.

"I think the biggest part of the story is the auto 401(k) provisions," said Christopher Jones, chief investment officer of Financial Engines. "We're definitely seeing strong demand for managed account services. Large plan sponsors are looking at the default (option) for their plan and want to upgrade from stable value or balanced to managed accounts. We have eight or 10 that offer managed accounts as a default now and we expect that to grow in the next six to nine months."

Financial Engines, which rolled out its managed account service 22 months ago, had $5 billion as of June 30.

PSCA's Mr. Wray said lifecycle funds and managed accounts will likely be center stage when the Labor Department addresses appropriate default options. It will be interesting to see how sponsors react once the guidelines are in place, he added.

"Either way, these new participants will accumulate trillions of dollars, which will help them enjoy the best retirement experience of any generation in history," said Mr. Wray.