ThyssenKrupp boosts use of auto features to ease participant path

Defined contribution executives at ThyssenKrupp Materials NA Inc., believe the principles of automatic features can help plan participants become more tax-efficient in their retirement savings.

Starting Jan. 1, new employees will be automatically enrolled in the company's traditional 401(k) plan or its Roth option, depending on their annual salaries. Those earning more than $50,000 will be auto enrolled in the former; those earning less than $50,000 will be auto enrolled in the latter. Employees may opt out.

Plan executives said they wanted to meet the needs of a diverse workforce — warehouse workers, higher-paid executives, people near retirement and younger workers — as well as to overcome the inaction by workers confused by the Roth option, said Kathryn Towe Littleton, director of human resources for ThyssenKrupp Materials, a Southfield, Mich.-based subsidiary of Germany's ThyssenKrupp Services AG.

“What employees don't know, they don't do,” said Ms. Littleton.

The Roth option — in which participants' contributions are taxed, but distributions are not — should appeal to people in lower tax brackets, Ms. Littleton said, adding that using an automatic approach should help them overcome inertia.

That's where the plan feature called dynamic automatic enrollment comes in. For now, it will be available only to new employees because that's the initial coverage offered by its creator, John Hancock Retirement Plan Services, the company's record keeper.

John Hancock will later expand this program to cover existing participants. “ThyssenKrupp will review that version when it becomes available,” Ms. Littleton said. Current employees may select the Roth option.

The company introduced its 401(k) plan in 1994 and added the Roth option in 2012. The Roth participation rate is 8% — low but not a surprise. “We felt that's what something new might be,” said Ms. Littleton describing the participation rate.

The $190 million ThyssenKrupp Materials' 401(k) plan had been an early, and aggressive, adopter of auto features — auto enrollment in 2005 and auto escalation in 2006. Both have opt-out features, but existing employees are auto enrolled in the traditional 401(k) and also are enrolled in auto-escalation, every year. The default initial deferral rate is 3%; the auto escalation is 1% of salary per year. The cap on the combination of auto features is 25% of salary per year, and the average annual deferral is 7%.

All employees are automatically enrolled in a qualified default investment alternative called a conservative moderate model portfolio the allocation in which is 48% equity and 52% fixed income. This is one of five risk-based portfolios — varying in ratios of stocks and bonds — built from 17 investment options in the plan's lineup. Employees may opt out of the QDIA.

Ms. Littleton said the company's approach to auto features illustrates a willingness to explore new ways to increase participation — it has a 95% participation rate among active employees — and to enhance account balances. The plan covers approximately 2,900 active employees and another 940 former employees who still have balances.

The company moved quickly to install the dynamic automatic enrollment. The plan's investment committee was approached by John Hancock in June about using the salary-based auto-enrollment approach. After consulting with the plan's investment adviser, UBS Retirement Plan Consulting Services, the committee — composed of representatives from all company business units — endorsed the approach. “They said it's the right thing to do,” Ms. Littleton said.

John Hancock developed dynamic automatic enrollment because its record-keeping data showed participants' use of the Roth 401(k) option was small and slow-growing even though more client plans were offering this option.

Forty percent of John Hancock clients with 401(k) plans exceeding $5 million in assets offered Roth options as of March 31, 2011, vs. 66% five years later, according to statistics provided by the company. During that period, the percentage of participants enrolling in the Roth option rose to 9.2% from 8%.

The low participation rate is a product of participant inertia and confusion about how the Roth feature might benefit certain participants, said Jeff Bograd, senior retirement plan consultant, John Hancock Retirement Plan Services, based in Westwood, Mass.

“Historically, everybody auto enrolled the same way,” he said. “Why should a 50-year-old executive be auto enrolled the same way as a 22-year-old coming out of college?”

People earning less than $50,000 annually are least likely to contribute to a Roth account, according to internal John Hancock research. Major reasons include participants' lack of financial knowledge and their struggle with the tax implications and investment allocations for Roth accounts.

An automatic approach would not only get participants into a 401(k) plan but also enable them to achieve the highest savings at retirement, Mr. Bograd said.

Using a client's data, John Hancock can analyze the tax advantages for participants based on their salaries. In theory, the lowest-paid employees could be auto enrolled in the Roth 401(k) option; the highest-income workers could be placed in the traditional 401(k); and the employees in the middle might be auto enrolled in a combination, say 50/50, of each.

Selecting salary guidelines is the sponsor's choice. Mr. Bograd said. ThyssenKrupp Materials chose a two-salary formula in becoming the first client to offer dynamic automatic enrollment.

“I want to be first,” Ms. Littleton said. “I want to be on the leading edge.”