It’s automatically better in Britain

By Tom Foster
E. Thomas Foster Jr. is head of strategic relationships for retirement plans for MassMutual.
Posted on Mar 3, 2019

An Anglophile is a person who greatly admires England or Britain, especially when it relates to customs and traditions.

There are many ways for Anglophiles to express their admiration: Displaying the Union Jack, Britain’s flag, drinking tea in the afternoon, driving a British luxury vehicle or closely following news about the Royal Family. God Save the Queen!

Employers in the United States that sponsor retirement plans may also consider emulating their British cousins, especially when it comes to boosting savings and participation. Parliament in 2012 mandated that all employers automatically enroll their employees in retirement savings plans. The results have since been nothing short of brilliant.

Participation in employer-sponsored retirement plans has since climbed to nearly 90 percent for large and medium companies and 70 percent for smaller firms, according to a new study by the Center for Retirement Research at Boston College .1 Moreover, the percentage of employees who have boosted their contributions rates has risen as well.

Back in the United States, participation rates in employer-sponsored retirement plans have languished just below 50 percent between 2012 and 2016, according to Boston College. It would seem that the States could learn a few lessons from across the pond.

Should the U.S. mandate automatic enrollment? Well, the U.S. hasn’t gotten that far as Congress currently ponders legislation that would require the vast majority of employers to offer a retirement plan. The bill would increase the number of people with access to retirement plans by at least 22 million, according to the American Council of Life Insurers (ACLI) , which supports the proposal.2

Meanwhile, financial advisors can help promote the benefits of automatic enrollment to employers as an investment in making retirement savings plans as effective as they can be. To be fair, many U.S. employers have already gotten started.

Rubbish you say? Well consider that the Plan Sponsor Council of America (PSCA) reports that 61.2 percent of employers offering a retirement savings plan now automatically enroll employees.3 I’m chuffed to bits (pleased) but there still is room for improvement.

Advisors may counsel employers to not only start automatically enrolling employees but to consider additional tactics that can make automatic enrollment as effective as possible:

1. Start enrolling employees at a higher percentage of pay. One of the criticisms of auto enrollment in the U.S. has been that employers often start employees at a percentage of pay that is unlikely to help them save enough for retirement at any age. Many employers continue to start contributions at 3 percent of pay or lower, according to the PSCA.

Employers can implement a higher default rate for employee contributions and employees can then decide whether to continue doing so. Many advisors recommend that their clients save between 10 percent and 15 percent of their income towards retirement, so employers may want to consider doubling or even tripling the 3 percent default rate.

2. Account for matching contributions. Not all employers match contributions but those that do can consider starting automatic contributions at whatever level qualifies for full matching contributions. That’s a strategy for employers that literally want to invest in their employees’ retirements.

Employers have been stepping on the gas, offering more generous matching formulas, according to the PSCA. Employers that provided dollar-per-dollar matching of more than 3 percent of pay increased to 35.8 percent in 2017, up from 24.1 percent in 2016.

3. Automatically escalate contributions. Among employers that employ auto enrollment, 60 percent automatically escalate participant contributions, according to Willis Towers Watson, a leading global advisory company. The PSCA reports that three out of four plans automatically escalate contributions by 1 percent a year; 8.6 percent auto escalate by 2 percent and 5 percent auto escalate by 3 percent.

4. Consider the benefits of pre-tax contributions . Saving pre-tax may help employees better afford to save for retirement by reducing their taxable income. If they’re already saving, making pre-tax contributions may help them boost how much they can save. Of course, each employee’s individual tax situation may be different and anyone who makes the decision to save on a pre-tax basis should consult a professional tax advisor before doing do.

5. Implement an education and communications plan. Employers can do a world of good by regularly promoting their retirement savings plan to employees, reminding them of the plan’s short- and long-term benefits. Communications should be targeted based on demographics such as gender, age, life stage and economic level. The best retirement plan recordkeepers are able to help employers target messages appropriate for different demographics of employees.

Education may play a big role as well in convincing employees to save and even save more for retirement. Advisors can help by conducting workplace seminars on retirement readiness, investing strategies, the power of compounding and other topics. Many employees want to receive information and guidance on electronic devices, including mobile, tablets and desktop computers. Advisors should quiz providers about their educational capabilities.

As the U.S., Britain and other countries around the world address aging populations and the resultant pressures on retirement security, government officials, employers and the financial services industry are looking for new answers to help workers retire in security and comfort. Some of the solutions may be instructive for all involved.

It’s been said that the U.S. and Britain are two like countries separated by a common language. Words aside, the success and expansion of automatic enrollment for employer-sponsored retirement plans may mean that the two countries will eventually share uncommon retirement planning success.

E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).

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1 The Center for Retirement Research at Boston College, “Requiring Auto-Enrollment: Lessons from UK Retirement Plans,” March 2019.

2 The American Council of Life Insurers, “Life Insurers Endorse Bold Solution To Close The Retirement Savings Gap,” March 12, 2019.

3 Plan Sponsor Council of America (PSCA), “Plan Enhancements Drive Record Retirement Savings Rates,” Jan. 23, 2019.

MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.