A Look at Automatic Enrollment in the U.S. to Predict the Success in the U.K. and Potential Opportunities for HRO Service Providers

There is currently a global crisis of people failing to save enough funds for their retirement. This reality is faced by those nearing retirement, and it’s affecting millions more. Reasons for this range from a lack of an employer plan to it being too confusing to simply just not getting around to it. In an effort to manage the crisis, legislation has been enacted to facilitate the ease of saving.

 

In the U.K., the primary answer lies in the automatic enrollment (AE) requirement of the Pensions Act of 2008. The AE requirement compels employers to automatically enroll their employees into qualifying pension schemes and to contribute to the pension as well. AE will commence in October 2012 and will be rolled out in stages based on employer size until September 2016 with large organizations (i.e., those with more than 120,000 employees) starting first.

 

Trying to predict the success that AE will have in the U.K. is difficult, but perhaps the Pension Protection Act of 2006 (PPA) in the U.S. can provide some guidance.

 

Recently, Fidelity highlighted the positive impact that the PPA has had on participation rates among other things. Fidelity’s plans that offer AE have increased to 21%, up from 2% in 2006. Furthermore, the AE feature is a part of 63% of plans with more than 50,000 participants, and Fidelity has seen participation increasing as a result of AE.

 

The average participation rate for plans without AE is 55%; but with AE, the participation rate is 82%. More interesting is the effect that AE is having on younger employees, who are typically not too concerned with saving for retirement. For employees between ages 20 and 24 years old, the participation rate for plans with AE is 76% and only 20% for plans without AE.

 

While the PPA in the U.S. does not require AE by all employers, it is proving to be an effective way to encourage participation to actively save for retirement, and it can also provide further opportunities for HRO service providers.

 

In the U.K., for example, Capita has already won business related to the AE requirement of the Pensions Act of 2008. It was awarded a 7 year £105m contract by the U.K. Pension Regulator to support direct communications and transactional processes with employers for AE that began in October 2011. Capita’s responsibilities include:

• Communicating campaign messages to employers
• Communicating AE duty dates to employers
• Ensuring employers register with the regulator
• Operating a customer contact center
• Some enforcement activities such as administering compliance notices and penalties for non-compliance.

 

Shortly after Capita’s contract award, Xafinity became the first pension administration provider to launch an AE offering that:

• Identifies who to automatically enroll and when to enroll them
• Sets a course of action for all stakeholders
• Runs financial analysis on different scenarios and take-up rates based on employee data, and selects a strategy that supports corporate objectives
• Provides AE administrative services including member communications; employee identification; auto-enrolling, opting out, and re-enrolling employees; and reporting.

 

Expect to see more HRO service providers based in the U.K. and others doing business there to launch an AE offering. Some may be late to the game though since the first staging date is less than a year away and compliance can take ~18 months to achieve. It is an area with lots of potential and service providers like Capita and Xafinity are well-poised to gain the first-mover advantage.

 

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

 

Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.

 

Recruit and Retain Employees with a Creative Benefits Package

Kudos to the Affinity Federal Credit Union.  In the Spring 2011 issue of the Affinity Connections magazine, there was an article titled “Recruit and Retain Employees with a Creative Benefits Package.”  We often write about recruitment and benefits in our blogs and this article makes the simple yet important tie-in that you need an effective benefits strategy for attracting and retaining talent.  I couldn’t agree more!

It’s not just about the money, but about benefits that include:

• Health, disability, and life insurance
• Tax saving ways to pay for health expenses and child care
• Retirement plans
• Opportunities to continue education
• Flexible working hours, etc.

The article points to a 2010 study done by MetLife on employee benefits trends.  It states employers greatly underestimate the loyalty factor of retirement benefits, non-medical benefits (i.e., dental, disability, vision, life, etc.), and work-life balance programs.  I would also add in retirement savings plans since there are fewer pension plans and great doubts about what will be there for social security, particularly for the younger generations.

The major benefits, which are also the most expensive, are retirement plans, health insurance, and paid leave.  But, employers need to be creative and think out of the box at more cost-effective options.

The study states that 61% of employers and 56% of employees say that work-life balance programs are effective at improving productivity at work.  Examples of such programs include flex working hours and access to financial planning resources, such as Aon Hewitt’s integrated advisory offering to its DC plan participants through its subsidiary Aon Hewitt Financial Advisors.  Other ideas include:

• Flexible working hours
• Flexible spending accounts
• Employee assistance programs (EAP)
• Matching donations
• Educational opportunities including on or offsite employee training & seminars, tuition reimbursement, and paid time off to attend classes.

As the economy recovers, turnover will increase.  As the talent marketplace becomes more competitive again, it is important to see that offered benefits are utilized.  A benefits outsourcer or HRO provider can help with data mining to analyze benefit utilization patterns across key positions and geographies.  Also, total rewards statements help employees see the full impact of their benefits.  Modern benefits communication and decision support tools help participants know about and make optimum choices.

Outsourcing vendors, not just benefits providers, but also RPO providers who are helping their clients with talent management including attraction and retention strategies, should be engaging with their clients to ensure that they have a better benefits package than their competitors!  How do you stack up?

Gary Bragar, Lead HRO Analyst, NelsonHall

The Yellow Brick Road to Financial Growth in Benefits Outsourcing

There are a variety of ways to grow HRO service provider income. Well-traveled roads include winning new clients or expanding services with existing clients. Another avenue is to cross-leverage consulting and outsourcing to build revenues for other service lines. Now, a new path has emerged and it looks like a yellow brick road to generating revenues: provide advisory services directly to defined contribution (DC) plan participants and not just to the plan sponsors.

According to The Financial Engines National 401(k) Evaluation report, approximately three out of four participants are not on track to comfortably retire by age 65 (i.e., they can’t replace 70% of their pre-retirement income with their 401(k) and social security). In addition, 34% do not have diversified portfolios and/or have inappropriate risk levels and 39% of participants do not contribute enough to even receive the full employer match. With DC plans replacing traditional pension plans for many employees, effective participation has taken on increased importance.

Participant DC service options were greatly expanded by the Department of Labor’s regulations, starting with the Pension Plan Act of 2006. Now, DC plans can offer automatic enrollment into qualified default investment alternatives, automatic saving escalations, and investment advisory services. Great, but the regulations are complex and are still being clarified and there are fiduciary responsibilities that must be addressed to provide a safe harbor to the plan sponsors and appropriate protections for the advisors. For BAO providers who have the expertise and fear not to tread on a road still under a bit of construction, this is a growth opportunity.

Amy Gurchensky, one of my NelsonHall HRO colleagues, just added tracking service coverage of Aon Hewitt’s new integrated advisory offering for its DC plan participants through its subsidiary, Aon Hewitt Financial Advisors. Aon Hewitt continues to expand its wealth management and retirement financial services for employers and participants. In 2010, before the merger with Aon Consulting, Hewitt had acquired the investment advisory firm EnnisKnupp.

Aon Hewitt selected Financial Engines to be the sub-advisor and provider of the advisory platform. As Amy notes in her analysis, Financial Engines also provides services for ACS, a Xerox Company, Fidelity, Mercer and others like ING and J.P. Morgan. It is important then that Aon Hewitt is wrapping the standard third party offering in with its own materials so it will be able to extend a new service bundle that creates differentiation.

The bulk of retirement investment consulting revenues will continue to come from services to the plan sponsors, but adding a new road to growth in ancillary services is valuable and this one looks particularly golden. Given the millions of participants with the major BAO players, participant investment services will be a valuable win-win for the employers, participants, and service providers.

Linda Merritt, Research Director, HRO, NelsonHall