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

 

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Benefits Admin Outsourcing Providers Can be Boon to Employees’ Future and Companies’ Ongoing Pocketbooks

Employees with company-offered retirement savings plans are today facing a triple whammy – defined benefits offerings (such as traditional pension plans) are on the wane, especially for new hires; stock market volatility is severely impacting the value of 401(k) portfolios; and lack of understanding and investment planning advice is driving inactivity or poor contribution decisions.

And employers offering defined contribution plans are facing challenges of their own. Financial risk, market volatility and regulatory changes make it extremely difficult for companies to design retirement programs to align with their business goals and optimize results.

But benefits administration outsourcing providers – such as Fidelity, Hewitt and Mercer – which offer advisory services to their clients and make professional investment information more easily accessible to their clients’ employees can help all parties’ pocketbooks. Services beyond administration of benefits programs offered by some of the providers in today’s marketplace include: insight into how automatic enrollment can lower plan administration costs and save businesses time in the enrollment process; input into how the contribution limits for business owners and key employees can rise with more employees participating in the 401(k) plan; data on volume discounts; plan design; actuarial services; global risk services; investment consulting; legal consulting; administration and communication services; and employee-focused online information portals.

While all of the above are advantageous, auto enrollment in 401(k) plans, allowed by the Pension Provision Act of 2006,  is a biggie in driving participation – which is good for employers and employees alike – per recent Hewitt and Paychex studies. Based on a survey 160 U.S. employers, Hewitt found 59 percent of respondents already offer automatic enrollment to new employees, and an additional 12 percent are likely to implement it in 2010. Its survey also found that 74 percent of employees contributed to their 401(k) last year. And research published just last week by Paychex found that a whopping 92 percent of employees in small companies participated in their companies’ 401(k) plans when auto enrolled, as compared to 72 percent without auto enrollment.

On a broader scope, NelsonHall research found per its last benefits administration report that top benefits administration outsourcing drivers included, “Process improvements to improve participant experiences, e.g., faster and more flexible enrollment, more pension modeling tools and improved communication services. All drive an increase in the quality of service to benefit participants”.

To put the importance of defined contribution plans and making contributions to them based on professional investment information into laser clear focus, all we need do is look at the growing reality of the social security shortfall. The annual statement I received last week contained an * next to my benefit which said, “Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at anytime. The law governing benefit amount may change because as of 2037, the payroll taxes collected will be enough to pay only about 76% of scheduled benefits.” Sobering? You betcha. So employers: help your employees out with retirement contribution plans…doing so will also help you in innumerable ways. And employees: don’t wait. Obtain the information you need to make the right investment decisions and begin participating today!

Gary Bragar, Senior HR Outsourcing Analyst, NelsonHall