Research by Wells Fargo Institutional Trust & Retirement confirms that opt-out rates for a 3% deferral rate are almost identical to those rates at 6%, said Melissa Hooker, the Charlotte, N.C.-based senior vice president and head of relationship management.
For the former, the opt-out rate was 11.3%; for the latter, 11.4%. “That helps clients understand” they can raise the deferral rate without much objection from participants, she said.
The research also found that lower-income and higher-income participants have “virtually the same” opt-out rates, said Ms. Hooker. “Our job is to do some myth-busting.”
Clients must weigh the fears of employees' negative reactions against participants lacking enough money to achieve an 80% income-replacement ratio in retirement, she said. That 80% represents a combination of retirement plan savings, Social Security and participants' non-retirement savings.
Wells Fargo executives recommend plans using auto features encourage participants to save at least 10% of salary a year — starting with a 6% auto-enrollment deferral and employing a 2% of pay a year automatic escalation. “You need the two elements of plan design working together,” she said. “If you stay at 3%, you will not have enough.”
Although service providers say large plans are more inclined to offer auto features and higher auto-enrollment deferral rates, one Wells Fargo client, Riddle's Group Inc., Rapid City, S.D., showed a small plan can make a big effort to encourage greater savings.
The company's $20 million 401(k) plan started auto enrollment with a 1% deferral in 2013.
“We realized at the time that this was just start,” explained David Westergaard, executive vice president, CFO and treasurer of the jewelry-store chain. The plan raised the rate to 3% in 2014 and 6% in 2016.
The deferral rate was raised to 6% so employees can take better advantage of the company match — 50 cents on each dollar up to 6% of pay. The plan added auto escalation in 2014 at a rate of 1% of salary a year, with a cap of 10%. “Very few people opt out,” Mr. Westergaard said of the plan, which has 700 participants.
Like executives of many other DC plans, he said Riddle's executives debated whether the higher deferrals might be viewed by employees as creating a Big Brother atmosphere and/or pushing employees to opt out. “There was no difference” among opt-out rates at the 1%, 3% or 6% deferral levels, he said. Each opt-out rate was less than 1%.
Auto enrollment is for new employees as well as for those who are contributing less than 6% of pay per year. The auto enrollment takes effect at the beginning of each year, and employees may opt out. The company sends three separate mailings to employees alerting them to the auto-enrollment policy.
Maximizing participants' use of the company match was the main reason another Wells Fargo client, Southern Illinois Healthcare, Carbondale, raised its auto-enrollment deferral rate in 2013 to 5% from 3% for new employees, said Julie Neubig, benefits supervisor of the $197.5 million 401(k) plan that serves 3,933 participants. The match is 50 cents for each dollar of annual salary up to 5% of pay.
“This was a good-will effort to make sure people were prepared for retirement,” said Ms. Neubig. In addition to the match and the annual deferral, the plan offers auto escalation — 1% of pay per year — with a cap of 10%. Employees can opt out of both auto features.
“We try to get them to do at least 10%” of annual pay, said Ms. Neubig, adding this amount plus Social Security and outside income will help participants achieve an 80% retirement replacement income goal.