Disappointingly few Canadians are participating in their workplace retirement savings plans. Those who do aren’t paying much attention. So capital accumulation plan (CAP) sponsors are constantly searching for ways that inspire employees to save enough for retirement. One potential solution involves signing employees up by default.
Auto-enrollment isn’t new in the industry. After all, the Canada Pension Plan—46 years old in 2012—is an auto-enrollment plan with no opt-out option. The concept is also common in Australia, New Zealand and the U.K., where a new law (being phased in over five years) requires employers to auto-enrol employees in private workplace pension schemes.
In the U.S., federal legislation introduced in 2006 authorized employers to auto-enrol employees in 401(k) plans. Since then, average participation rates for Fidelity-run 401(k) plans have increased dramatically to 82% in plans with auto-enrollment versus 55% in plans without, according to a 2011 study by Fidelity Investments.
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Current CAP participation rates are typically around 55% to 60% in Canada. Such lacklustre figures suggest it’s time to consider the advantages of auto-enrollment, says Tom Reid, senior vice-president, group retirement services, with Sun Life Financial. “Employers want higher participation rates so key talent is effectively retained. Auto-enrollment is really a great behavioural tool that will get an extra 30% of people to save for retirement.”
Reid says some of his clients have implemented auto-enrollment for all new hires––with impressive results. “Employees can still opt out, but about 90% are staying in the plan,” he says. Small wonder that other clients are considering going the same route.
Jeff Aarssen, vice-president, group retirement savings, sales and marketing, with Great-West Life points to the cumulative benefits: “Auto-enrollment gets members contributing to their plans sooner to take advantage of their savings being invested over longer periods of time and to benefit from the greater impact of tax-free compounding of investment returns on their contributions.”
Read more: Employees saving more, but missing retirement goal
Jean-Daniel Côté, vice-president, retirement, with ACT actuaries, says auto features could help address one key reason for plan member inertia: an instant-gratification mindset.
“On the group benefits side, when you go to the dentist, fill a prescription or change glasses, you feel an immediate impact if you aren’t covered,” he says. “But retirement seems so far away that it’s easy to postpone saving.”
Like many others in the pension industry, Côté favours auto-enrollment. “I think there’s more acceptance that employees should be coerced or at least herded to participate,” he says.
Being automatically enrolled in a retirement saving plan is no guarantee that employees will, in fact, set aside enough money to retire comfortably—or even remain part of the plan in the long term. But placing people on the right path in the first place may help them stay on course.