The power of auto-enroll (& auto-sweep): What moves the needle in retirement savings

It has been 45 years since Congress passed the Revenue Act of 1978, making it possible for businesses to offer defined contribution plans such as the 401(k) to help employees save for retirement. The early adopters of defined contribution plans could not have known what the right formula would be to help ensure Americans could save enough to live comfortably in their sunset years. However, as the retirement savings gap has grown to nearly $4 trillion, there’s a recognition the traditional model is unlikely to be the future model.

Plain and simple, our industry has reached an inflection point. While great progress has been made to expand affordable access to retirement savings, our focus must now be on increasing access and engagement to create better outcomes for individuals.

Personalization rises to the forefront

Solely relying on a pension, Social Security, and/or 401(k) savings to provide retirement income can lead to insufficient savings. Even worse, it can result in a tendency to delay or ignore creating a financial plan with clear goals. Without a real plan accounting for both spending and required savings to lead the life they want (now and in retirement), too many individuals assume they will adjust their spending patterns later in life. Unfortunately, most Americans don’t know how to create a financial plan, and we know from experience they want point-in-time advice to find the right solutions for their unique and diverse needs.

Consumer behavior, preferences, and financial complexity are pushing personalization into the forefront of the work Principal is doing to help remove barriers to financial security. Tailoring retirement planning to the individual person, rather than relying on the traditional retirement model can help individuals better balance debt management, saving, and investing for the future. In an era of elevated volatility, ongoing inflationary impacts, and advancements in technology, it’s essential to enable the appropriate balance of in-person, automated, and dedicated advisor relationships to maximize value, experiences, and financial opportunities.

Personalization begins with equipping people with the tools, education, and advice they need to have confidence in their financial plans. And we believe focusing on behavioral and educational change will not only bring more people into the financial system but also give them the insights, support, and tools to help effectively save and plan for retirement.

Automated features can support long-term success

In collaboration with financial professionals and employers, Principal regularly evaluates how well employees are engaging and interacting with their benefits plan so we can tailor strategies that can increase inclusion and participation. One thing that has been enormously successful – even more than any type of education or advice – is automatic enrollment into an employer-sponsored retirement plan. In fact, according to surveys we have conducted, 81% of participants in plans serviced by Principal indicated that automatic enrollment helped them start saving sooner for retirement and, significantly, 94% of participants stay in the plan once they have been automatically enrolled.

Related: Ready to implement SECURE 2.0? Manual HR processes will leave organizations scrambling

Defaulting people onto a path with automatic enrollment and automatic escalation is a very effective inclusion strategy to help establish healthy savings and investing habits and to gain positive savings momentum. The provision in the SECURE 2.0 Act of 2022 (SECURE 2.0) that requires automatic enrollment and automatic escalation in most new 401(k) and 403(b) plans will greatly aid the efforts to increase participation and contribution rates. However, for plans created prior to the passing of SECURE 2.0, we believe there are two additional tactics that could prove beneficial:

1. Adjust plan design to default new employees into their employer-sponsored plans with the option to opt-out rather than leaving it as a choice when hired. The greatest success comes when automatic escalation is included in the design. Reason being, automatic enrollment will get employees into the plan and then automatic escalation provides a gradual approach to increasing their deferral rate while generally not having a large impact on their paychecks.
2. Re-enroll (or auto-sweep) employees who are not participating in the plan to make another conscious decision to contribute or not. Similar to the concept of annual elections for benefits like health, dental, and vision, re-enrollment would allow employees to re-evaluate their previous approach to retirement saving to gain alignment with their financial goals.

Individuals tend to have a high degree of trust in financial professionals, retirement plan service providers, and employers. It’s important our three entities continue collaborating in ways that better help people start and move along their financial journeys with confidence.

Access is the starting point for every conversation about financial security and saving for retirement. But we must also engage individuals with a broad array of education, tools, communication, and advice to support and serve them based on their diverse relationships to money and levels of financial confidence. The more personalized and tailored those experiences can be, the better outcomes we believe can be created to support their financial futures.

Teresa Hassara is Senior Vice President of Workplace Savings and Retirement Solutions at Principal Financial Group.