Making retirement income work part 3: Combating inertia with auto-enrollment

The introduction of new concepts in the defined contribution (DC) marketplace can take years to be fully implemented. For example, the idea of automatically enrolling participants into the plan and into a specific investment was viewed with caution when first introduced. Today, 76% of large plans automatically enroll participants into the plan, showcasing its effectiveness and acceptance.¹

This article is part three of our four-part Making Retirement Income Work series covering plan sponsor and participant perspectives, legal considerations, and best practices around in-plan retirement income solutions.

DC plan sponsors recognize that auto-enrollment helps participants “help themselves” in reaching a secure retirement. Without it – due to inertia or lack of financial knowledge or confidence – many participants would miss out on the benefits of both tax-deferred savings and investing. Plan sponsors benefit as well by gaining fiduciary safe harbor protection when they select a qualified default investment alternative (QDIA) for defaulted participants who fail to make an investment election on their own.²

As the industry shifts its focus from retirement savings to retirement income, plan sponsors can adopt an automatic enrollment approach when adding retirement income solutions (non-guaranteed or guaranteed) to their plans due to the flexibility of the default rules and the QDIA definitions. Doing so can help combat participant inertia and keep assets in the plan if desired.

In this series, we define retirement income solutions to include a range of flexible withdrawal options, tools, and non-guaranteed investments and/or guaranteed (insured) solutions.

Plan sponsors and participants view auto-enrollment in retirement income solutions favorably

The following perspectives come from Show me the income, Invesco’s 2022 defined contribution research that explored large-plan sponsor and participant preferences for creating retirement income.

When asked, 92% of plan sponsors viewed auto-enrolling into a retirement income solution favorably due to:

• It makes plan administration easier (42%).
• It makes it easier for participants by combating inertia (37%).
• Participants benefit by having consistent monthly income in retirement (36%).

Given that participants said their biggest fear is running out of money in retirement, 80% favorably viewed automatic enrollment into a retirement income solution, with the ability to opt out without penalty when notified. This applied to both guaranteed and non-guaranteed solutions. Why? Participants appreciated how auto-enrolling into a retirement income solution would help them with consistent monthly payments, make a choice easy for them, and they weren’t forced to make an investment decision. 

Participants who had been automatically enrolled in their plan had the most positive view, as it was already a familiar concept. Even those participants who indicated they worked with an advisor, had higher incomes, or had access to a defined benefit (DB) plan, viewed the concept favorably.

Interestingly, using the right language when discussing retirement income mattered to participants. When described as “automatically enrolling” into a retirement income solution, 77% viewed it favorably. But, when described as “automatically transitioning,” 88% view it favorably – more than a 10% increase.

QDIA safe harbor considerations

One of the reasons automatic enrollment has been so successful is the fiduciary safe harbor for the selection of a QDIA for defaulted participants, that is, for automatically enrolled participants who fail to make an investment election.

In that case, if an appropriate type of investment (e.g., target date fund, target risk fund, or balanced fund), service (e.g., managed account), or portfolio (e.g., a collective investment trust) is selected, the fiduciaries, such as plan committee members, have a safe harbor for the decision to use that type of investment, even if it includes a guaranteed solution. Because of the flexibility of the default rules and the QDIA definitions, plan sponsors can, if desired, adopt an automatic enrollment approach to adding retirement income solutions to their plans. However, the selection of a particular investment or service provider is still a fiduciary decision.

The DOL regulation on automatic enrollment is remarkably flexible, stating that if a participant is required to make an election (or a new election) about investments or services, proper notices are given, and an appropriate default investment is provided. A participant who fails to make a new election will be deemed to have decided to invest in the QDIA, and the fiduciaries will be entitled to the protections of the fiduciary safe harbor.

While qualifying investments, services, or portfolios do not, on their face, include guaranteed income products issued by insurance companies, the DOL addressed that issue in the preamble to the QDIA regulation:³

“Finally, with regard to such products and portfolios, it is the view of the Department that the availability of annuity purchase rights, death benefit guarantees, investment guarantees or other features common to variable annuity contracts will not themselves affect the status of a fund, product or portfolio as a qualified default investment alternative when the conditions of the regulation are satisfied.”

The regulation is even more explicit:

“An investment fund product or model portfolio that otherwise meets the requirements of this section shall not fail to constitute a product or portfolio for purposes of paragraph (e)(4)(i) or (ii) of this section solely because the product or portfolio is offered through variable annuity or similar contracts or through common or collective trust funds or pooled investment funds and without regard to whether such contracts or funds provide annuity purchase rights, investment guarantees, death benefit guarantees or other features ancillary to the investment fund product or model portfolio.”

In short, plan sponsors can rely on the same QDIA fiduciary safe harbor protection when auto-enrolling participants into retirement income solutions.

Next steps

Plan sponsors considering auto-enrolling into a retirement income solution should confirm it fits with the plan’s objectives and update any plan documents as needed (see Part 1: Making Decisions). 

Then, the plan committee should follow the DOL’s QDIA fiduciary safe harbor regulations:

• Provide an appropriate default. If an appropriate type of investment, service or portfolio is selected, the fiduciaries have a safe harbor for the decision to use that type of investment as the QDIA, even if it includes a guaranteed solution.
• Provide proper notices to participants about the default.
• Invest participants who do not affirmatively select their investments into the QDIA.

To learn more, download Fred’s retirement income legal and best practices checklist.