By Kathryn Kretschmer-Weyland
June 4, 2007

As public sector retirement plan providers recognize increasing fiduciary responsibility, one important aspect that arises is that there must be an increasing awareness among public employees that supplemental defined contribution plans are an important part of the total retirement benefits package. The classic defined benefits program is seemingly no longer enough to allow retirees to fully realize retirement goals. Platinum Member Nationwide Retirement Solutions (NRS) notes that as public sector employers recognize the importance of supplemental plans, such as NRS’s 457 program, these employers must put into place a plan structure that will encourage employee participation. Plan structure should also be designed to better meet the long-term retirement goals of employees.

The question remains then, how can public sector employers encourage employee participation in supplemental plans? Offering literature and education opportunities about supplemental plans is not always enough to entice employees to make the decision that will ultimately benefit their retirements. A recent NRS study found that a current trend in the private sector market is automatic enrollment for new employees. Unless employees specifically choose to opt out, employers place them into the plan. For those who do not make choices, employers have default deferral amounts and investment choices. According to NRS, nearly 20 percent of U.S. businesses have initiated automatic enrollment processes in their retirement plans.

Further NRS research indicates that automatic enrollment has a positive impact on participation rates for defined contribution plans. The 2005 Employee Benefit Research Institute (EBRI) Retirement Confidence Survey found that 66 percent of workers not currently enrolled in retirement plans would be very or somewhat likely to remain in the plan had they been automatically enrolled. Another EBRI study found that automatic enrollment in certain private sector 401(k) plans increased participation from 66 percent of eligible workers to 92 percent with the largest impact being shown among lower income workers.

Despite some previous concerns about the fiduciary responsibilities associated with automatically enrolling employees, reports from 2005 show that there is increasing support for implementing this technique. There are some concerns that automatic enrollment causes employees who would have participated regardless to stay in the default categories for investments and deferral amounts. There are also concerns that employees are automatically placed with more conservative investments. However, as more plans implement automatic enrollment, possible corrections to these problems are introduced and developed. By looking to success and shortcomings in the private sector, public sector plans can learn how to better serve employees.

NRS has even more information on retirement plan trends that could impact and help your city’s employees. For more information, contact Jeff Bean at 202-446-8140 or jbean@usmayors.org or Kathryn Kretschmer-Weyland at 301-460-5251 or kweyland@usmayors.org.