We have reviewed a number of studies that indicate that only about two-thirds of the eligible employees in 401(k) plans are actually deferring into the plans. As a result, many employers have been focusing on improving the levels of participation in their plans. While automatic enrollment is capturing the headlines, there are other approaches-—which will be particularly useful to employers who decided to not automatically enroll.

Perhaps the most successful alternative approach has been a process commonly known as Quick Enrollment™ or Easy Enrollment.

We have recently posted a paper on our website which describes Quick Enrollment™ and which examines two employers who utilized that procedure. The paper is entitled “Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment™.” The paper is authored by James Choi from Yale, David Laibson from Harvard, and Brigitte Madrian from the University of Pennsylvania.

The abstract describes the paper as follows:

The complexity of the retirement savings decision may overwhelm employees, encouraging procrastination and reducing 401(k) enrollment rates. We study a low-cost manipulation designed to simplify the 401(k) enrollment process. Employees are given the option to make a Quick Enrollment™ election to enroll in their 401(k) plan at a pre-selected contribution rate and asset allocation. By decoupling the participation decision from the savings rate and asset allocation decisions, the Quick Enrollment™ mechanism simplifies the savings plan decision process. We find that at one company, Quick Enrollment™ tripled 401(k) participation rates among new employees three months after hire. When Quick Enrollment™ was offered to previously hired non-participating employees at two firms, participation increased by 10 to 20 percentage points among those employees affected.

The posting of these studies is part of our support for research into participant behavior and methods for improving retirement benefits. We also contribute to UCLA to underwrite the research of Professor Shlomo Benartzi.

 

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: The Adviser Report