Automatic 401(k) Case Study

A Reluctant Trend-Setter Puts Employees on the Path to Retirement Security

They say they aren’t the kind of company that seeks to set trends. In fact, they see themselves as pretty conservative.

Yet this specialty pharmaceutical company was among the first to add automatic features to its 401(k) plan. It was back in 1997 or 1998; they can’t quite recall the year they started.

The company’s motivations were simple. They were passing the nondiscrimination tests each year, but by increasingly slim margins. Further, their people just weren’t making good use of the plan. The company sponsored a defined benefit pension at the time, along with an employee stock ownership plan, neither of which employees had to contribute to. Taking a long view of the benefits program, the company recognized the growing importance of the 401(k) plan. But their employees didn’t.

Fast forward 10 years. The company sails through its nondiscrimination tests, and employee participation and contribution rates are at an all-time high. The secret? There isn’t one, really. It’s a simple matter of automatic 401(k) features and focused communication.

Company Snapshot

Type:	Publicly-traded	Participation Rate:	95%
Industry:	Specialty Pharmaceuticals	Automatically Enrolls:	New hires
U.S. Employees:	3,700	Default Contribution Rate:	3%
401(k) Plan Assets:	$494.2 million	Contribution Increases:	Automatic if employee chooses
		Default Investment:	Balanced fund

How They Do It

Automatic Enrollment
New employees are automatically enrolled in the 401(k) after their first 30 days on the job. The company goes the extra step of requiring employees to sign a notice confirming they understand the nature of the plan. They have no trouble getting the forms back, even among a sizable off-site sales force.

Recently, the company acquired another entity. They decided to treat the acquired company’s employees as new hires and automatically enrolled them into the 401(k) plan.

Default Contribution Rate
The company has kept the initial employee contribution rate at three percent since first adopting automatic enrollment. The employer match is 100 percent of employee contributions, up to four percent of salary.

“We’ve thought about raising the default rate over the years,” comments a senior human resources manager. “But our people have a good track record of adjusting their contributions to meet their circumstances, so we’ve kept it at three percent.”

The company focuses specific communications on participants who remain at the three percent default rate, and it appears to be successful. The average contribution rate across all employees is an impressive 8.5 percent. Beginning this year, employees have the option to set automatic contribution increases.

Default Investment Fund
The contributions of automatically enrolled employees are directed to a balanced fund. Participants who stay in the default fund receive targeted communications, just like those who stay at the default contribution rate. Currently, 87 participants have left their default investment fund untouched.

Administration Issues
The company changed 401(k) service providers several years ago, but it was a non-event as far as administering the automatic defaults.

The current service provider simply transmits a file to the company’s payroll office twice a month. The file lists new hires from the prior 30 days who were not included in the previous transmission and payroll keys them into the system at a three percent contribution rate. The file also includes information on changes in contribution rates and new loans.

The service provider sends the company a periodic “report card” on plan statistics, to give the company a snapshot of participation, contribution rates, investments, and account balances. “We’ve found the report card to be very useful,” explains the HR manager. “We use the information to see where to target our communications.”

On the subject of communications, the company finds that automatic features call for more communication, rather than less. The first challenge they found was explaining an automatic 401(k) plan to people who never heard of it. With a mere five percent opt-out rate, it seems like they figured out an effective way to do it.

Other plan statistics point to additional automatic 401(k) successes for the company. For example, the national average account balance in plans of this size is $56,000.¹ The average account balance in our case study company is $97,000. Every age group in the plan has higher average account balances than the national average.

Advice from the Reluctant Trend-Setter

“Our company has a conservative culture. We didn’t intend to be a trend-setter with our 401(k) plan. We just believed at the time that the features made a lot of sense for us and for our people,” explains the HR manager. “We felt comfortable about our plan from a regulatory perspective, and we’ve never questioned our decision to automate.

“We are happy with the results in increased participation and contribution rates. We team with our service provider to target communications to specific groups to address any participation concerns we see.”

She goes on to explain, “I didn’t realize that our plan’s averages are so much higher than the norm. We didn’t intend to lead the automatic 401(k) revolution, but based on our results, we’re happy we did.”

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¹ Fidelity Investments. Building Futures Volume VII. 2006. The research data are based on 9.1 million participants across 11,721 plans. The report breaks down results by plan size. See the full report at: buildingfutures.fidelity.com/pdfs/full_version.pdf.