Nationwide Uses Automatic 401(k) Features to Help Prepare Associates for Retirement
Here is a by-the-numbers look at Nationwide’s implementation of its Nationwide Savings Plan. It’s a statistical portrait of results before and after rolling out Nationwide’s automatic enrollment and automatic increase features.
To determine the retirement readiness of its associates, Nationwide employed a methodology called PREP, which stands for Personalized Retirement Education and Planning, developed by Aon Consulting, described in more detail below. Beyond the enrollment numbers and readiness estimates, this is a story of some of the challenges Nationwide faced, and results that ultimately exceeded expectations.
By the Numbers
For those who just want the numbers, here they are:
|Category||Pre-Auto Increase/Enroll||Post Auto Increase/Enroll|
|Average deferral rate||5.8%||6.8%|
|Associates PREPared for retirement||18,605||21,715|
|% PREPared for retirement||54%||64%|
|% prepared by age group|
|25 - 34||66%||83%|
|35 – 44||59%||67%|
|45 – 54||45%||48%|
|54 – 65||26%||26%|
Before & After – Participation and PREPared Rates
Before & After – Number of Associates Participating and Number PREPared
Before & After – PREPared Rates by Age Cohort
Setting the Stage
Nationwide, headquartered in Columbus, Ohio, is one of the largest insurance and financial services companies in the world. The company focuses on domestic property and casualty insurance, life insurance and retirement savings, asset management and strategic investments. The primary plans providing retirement income benefits to Nationwide associates are the Nationwide Savings Plan (official name of the company’s 401(k)) and the Nationwide Retirement Plan. Here’s a little more on each of these plans:
Nationwide Savings Plan
- Adopted July 1968
- Immediate participation
- Match: 50% on the first 6%2
- Five year graded vesting (20% per year of vesting service)
- Pre-tax, Roth and after-tax contributions (after-tax limited to non-highly compensated employees). Maximum deferral of 80% (subject to applicable limits)
- Fifteen core investment options, ten target maturity options (comprised of the core options) and a self-directed brokerage account option.
- Assets - $2.8 billion (as of June 30, 2007)
Nationwide Retirement Plan2
- Adopted March 1946
- Participation begins after 12 months of service.
- Better of two formulas for those hired prior to 20023, Account Balance formula only for those hired after 2001:
|Final Average Pay (FAP)|
|1.25% on FAP + .50% on FAP in excess of social security covered compensation * years of participation (up to 35).|
|Account Balance Formula Crediting Rates - As of Jan. 1, 2008|
|Years of Service||Credit Rate (up to Social Security Taxable Wage Base (SSTWB))||Credit Rate (Compensation in excess of SSTWB)|
- Interest credits based on 30-year Treasury weighted average.4
- No maximum participation service.
Prior to 2007, Nationwide had typical enrollment provisions. In the years immediately prior to 2007, Nationwide had added Easy Enrollment and Easy Increase provisions. Easy Enrollment was a “single click” enrollment process—electing 6% of pay pre-tax, 100% allocated to a fixed income investment. Easy Increase was an election to increase deferrals annually—by 1%, 2% or 3% of pay. Since 1998, despite considerable communications efforts and provisions such as Easy Enrollment, Nationwide’s active participation rate remained mostly unchanged—between 70% and 75% of eligible associates. Something needed to change.
For the past several years, the company learned from its total compensation statements that many associates were not adequately preparing for retirement. Nationwide had considered auto enroll/auto increase for a number of years. Issues such as fiduciary liability and inability to reverse deferrals worked to delay an earlier implementation. The qualified default investment alternative and 90-day revocation5 provisions in the Pension Protection Act (PPA) of 2006 resolved Nationwide’s issues with auto enroll/auto increase.
Solution: Auto Enroll/Auto Increase
At Nationwide, the auto enroll/auto increase provisions took effect with the first pay period in April—traditionally Nationwide’s common effective date for salary adjustments. For new hires, “auto enroll/auto increase” provisions are effective after 60 days of service. If no affirmative election was received, the following actions occurred in April 2007:
- If not currently participating – increase to 3% pre-tax
- If current contributions < 3% - increase to3 %
- If current contributions = 3 %, 4% or 5%, increases to 4%, 5% or 6% respectively
- If current contributions => 6% - no change
- If current contributions are Roth 401(k), auto-increase is Roth 401(k), else pre-tax
- For auto-enroll, contributions are allocated to the target maturity model closest to the associate’s 65th birthday6
How many associates Nationwide impacted by auto enroll/auto increase? Here’s an overview:
Of those associates eligible for auto enroll, the number that:
- Enrolled on their own - 1,631
- Opted out - 1,058
- Nationwide auto enrolled - 4,786
Of those associates eligible for auto increase, the number that:
- Opted the same deferral rate - 1,199
- Affirmatively changed rate - 53
- Auto increased to 3 % - 3,874
- Auto increased to 4 % - 1,270
- Auto increased to 5 % - 780
- Auto increased to 6 % - 685
PREP stands for Personalized Retirement Education and Planning, an analysis developed by Aon Consulting.
Aon’s analysis of retirement PREParedness combines the Aon Consulting/Georgia State University Retirement Income Replacement Ratio StudyTM with associate-specific data. The study analyzes information about spending patterns, tax rates and other economic variables to develop benchmark income replacement ratios. These ratios vary by income, age and employment status of family members. Individual income replacement ratios based on projections (assuming retirement at age 65) of Retirement Plan, Savings Plan and Social Security benefits and future compensation are compared to the benchmark ratios.7 Using the various assumptions and date elements, an analysis is made to determine if the associate is PREPared.
PREP and Auto Enroll/Increase
While increasing participation was the primary goal in implementing auto enroll/auto increase,8 Nationwide was interested in evaluating the initial impact on its PREP numbers. Nationwide’s PREPared rate since 1997 had declined from 67% (1997) to 54% (2007). Factors contributing to the decline include changes in the replacement ratio factors used in the PREP calculations. Replacement ratios have increased since 1997 due to:
- Relatively minor decreases in expenditure patterns after retirement (i.e., spending doesn’t decrease that much in retirement).
- An increase in the percentage of disposable income needed due to a decrease in tax rates and a drop in savings rates (in essence, Nationwide used to having more money in Nationwide’s pockets that must be replaced in retirement).
The impact analysis began with compiling participation data from the second payroll following implementation of auto enroll/auto increase. This date was chosen to allow for the possibility that associates would change their deferral elections once they saw their pay impacted.9 Nationwide then updated the December 31, 2006 PREP calculations with the auto enroll/auto increase activity.10
To establish a benchmark measurement, an initial analysis was completed using the December 31, 2006 data assuming a 100 % auto enroll/auto increase opt in at the default deferral rates. This produced a projected increase in the PREPared rate of 54 % to 58 %. But, something great happened.
A Great Result
The final analysis used the actual deferral and opt-in data from the May payroll. Nationwide achieved a PREPared rate of 64%—10 points higher than the December 31, 2006 rate and 6 points higher than the projected result.11 Something seemed odd. Nationwide expected a rate between 54% and 58%, a good result. But, 64% was a substantial improvement, and, while Nationwide didn’t return to Nationwide’s original PREParedness level of 1997, the substantial increase of the 2006 rate (while holding all other variables constant) was certainly a pleasant surprise.12
What was going on?
A comparison of the data revealed many participants who were not impacted by the auto enroll/auto increase activity had nonetheless increased their contributions. Auto enroll/auto increase was implemented to coincide with the common effective date for annual salary adjustments.
What else happened?
When introducing auto enroll/auto increase, Nationwide followed the adage of communicate, communicate, communicate.13 Communications Nationwide delivered to all associates—not just those impacted by the auto enroll/auto increase feature. Feedback indicates the communications encouraged those not impacted by auto enroll/auto increase to increase their deferral rates on their own volition.
Through Easy Increase or by their own actions, 1,287 participants increased their deferral rates. The actions by these participants are responsible for the significant increase in the number of associates PREPared for a more secure retirement.
Nationwide intends to s renew the auto enroll/auto increase effort each year. One might view the annual renewal effort as an opportunity for eligible associates to, once a year, revisit their decision to participate at less than 6%.
Should you implement auto enroll/auto increase at your company? Here are some things to consider, given the Nationwide experience:
- If you offer a match, the financial impact may be significant; so, you too have to run the numbers.
- Don’t be afraid to include both current employees and new hires. Concerns about a negative reaction among current associates never materialized.
- It’s not just about retirement. Saving for the future, in whatever form, will help buffer the inevitable financial bumps.
Was Nationwide glad it implemented auto enroll and auto increase features as part of its 401(k) plan? The resounding answer is yes.