England and America are two countries separated by a common language.
–George Bernard Shaw
It’s not just the language that separates us and the British. It’s our attitude towards automatic enrollment in retirement savings plans.
Spelling aside, automatic enrolment has been the law in U.K. since October, 2012. Here in the U.S., the Pension Protection Act of 2006 addressed the legal aspects by adding provisions for automatic enrollment and the Qualified Default Investment Arrangement (QDIA), but did not make it mandatory.
We’ve been supporters of automatic enrollment since its inception as an effective way to deal with what everyone now acknowledges as the “retirement savings crisis”.
But it’s never really taken off in the United States; and now, it may have taken a step back. Robert Steyer writes in Pension and Investments that adoption of automatic enrollment is slowing down (login may be required).
But whether automatic enrollment eventually becomes law in the U.S. as some advocate, e.g., the President’s myRA proposal, there are some important lessons we can learn from the nascent British experience.
One of the U.K.’s leading advocates for automatic enrolment is The National Association of Pension Funds (NAPF) "whose membership includes 1,300 pension schemes which collectively manage assets of £900bn ($1.5 trillion U.S.) and provide retirement income for nearly 16 million people".
In October, 2013, the NAPF published a report, Automatic enrolment, one year on, which reviewed the results of their survey of the first year’s experience for both employers and employees.
The NAPF reported that employers said:
- Preparation is the key to successful implementation.In some cases, employers started planning years in advance. Smaller employers need to start planning as soon as possible.
- Communications are an essential component of automatic enrolment. Employers typically put strong emphasis on clear and engaging communications.
- The automatic enrolment regulations are too complex. This complexity is a disincentive for employers to go above the minimum.
Employees, they reported, said:
- They welcome the fact that they have been automatically enrolled. They see pension saving as an important and positive thing to do.
- Employees are still not very engaged with pensions. Employees rely on their employer to pick a good scheme and manage it for them.
- Although they are happy to be saving, many employees are aware that the current minimum contribution rates are probably too low. There is an appetite amongst some workers to save more.
Not much different from our own experience with clients who have taken the automatic enrollment route; and, we see success with open enrollment in much the same way. That is, you can’t start early enough:
- Engaging with with service providers
- Starting the communications campaign
Implementing automatic enrollment doesn’t have to be a daunting process. It can be made simpler using resources available from the aptly named Retirement Plan Simpler, a non-profit coalition of the American Association of Retired People (AARP), the Financial Industry Regulatory Authority (FINRA), and the Retirement Security Project. Their common mission is to encourage savings through automatic 401(k).
Picture credit: scienceprogress blog.