Plan Design Features ‘Moving the Needle’ for Workers’ Retirement

For companies trying to encourage employees to save more for retirement, some plan design features are available that, according to analysis from Vanguard, have proven to increase participation. 

Re-enrollment is an annual or one-time event which reverts workers who chose to opt out back into a retirement plan. Plan sponsors use re-enrollment to get workers back in plans and can use auto-sweeps to increase the default deferral rate for participants who are saving below the employer’s match.

These plan design features can empower workers to save at higher amounts: Plan sponsors that used re-enrollment achieved an average of an 84% success rate in 2021—meaning 16% of workers opted out and were not re-enrolled into the plan—according to a Vanguard analysis of 17 retirement plans that enroll more than 5,200 workers.

In 2021, 14 plans using Vanguard as a recordkeeper and enrolling more than 9,100 participants, automatically increased low-saving participants to the rate necessary to receive the full employer match. Overall, 78% of participants had their deferrals increased, as fewer than one in four participants opted out afterward.

Real-World Examples

Aunt Millie’s Bakeries, incorporated as Perfection Bakeries Inc., has used re-enrollment and auto-sweeps for its nonunion and union defined contribution plans, explains Judy Bobilya-Feher, the chief financial officer of the Fort Wayne, Indiana-based company.

The employer has experienced “remarkable results” with the plan design change incorporated to the nonunion plan in 2015 and in the union plan in 2018, Bobilya-Feher says.

“We’ve seen our participation rates increase from roughly 60% in both plans to approximately 98% in both plans, as well as deferral rates increase from 5% in the nonunion plan to 7.5%, and in the union plan from 6% to 7.7%,” Bobilya-Feher says. “We’ve also seen more workers able to replace 70% of retirement income—an improvement from 58% in the nonunion plan to 83%, and from 73% in the union plan to 79%.”

She adds, “We’ve definitely seen [account] balances increase, and the average balance is going up. This is right up our stream to be able to do these things to move the needle.”

Aunt Millie’s Bakeries  performs annual auto sweeps for workers who either opt out of the retirement plan or defer below the auto enrollment default deferral rate, she says.

“We pick up even the zeros [non-contributors] once a year,” says Bobilya-Feher.

An additional plan design change, for the union and nonunion plan, will be to increase the default enrollment rate from 4% to 5% on January 1, 2023.

“Committee discussion is that in a year, bar something holding us up from doing so, we plan to increase to 6%,” Bobilya-Feher says. Aunt Millie’s Bakeries also removed the cap for automatic escalation of deferrals, effective January 1, 2023.

“We had been discussing limiting deferrals to 20% to 25% and then asked, ‘Why cap it?’ We can’t pretend to know every participant’s personal financial situation to determine that a cap is relevant,” Bobilya-Feher says. “Dual incomes often allow people to defer higher [amounts for retirement].”

BorgWarner, a supplier of mobility systems to the automotive market, has used re-enrollment since the late 2000s and started with low levels of employee contribution rates for workers swept back into the plan, explains Michelle Behrman, director of global benefits at the Auburn Hills, Michigan-based company. BorgWarner employs approximately 5,000 workers, she says.

The plan sponsor monitors employee behavior and contribution rates to find the right balance of plan design tweaks.

“If we’re seeing an uptick in people who are opting back out of the plan after a re-enrollment sweep, then we’re going to change our communication strategy as well, to encourage those people to re-enroll at 6%,” Behrman says. “We also do targeted communications through Vanguard’s communication team to get people at least into the plan at 3% so that they’re not leaving the match on the table.”

The frequency for conducting re-enrollment is determined in consultation with Vanguard, “after annual reviews,” Behrman says. “We look at people who perhaps are in the under-savers category, and if we’re starting to see that number is increasing, or if we had a significant acquisition and we want to get people into the plan that perhaps didn’t participate in their prior employer’s plan, then we will go ahead and do a sweep,” she says.

“We’ve done [auto-sweeps of under-savers] more aggressively over the last number of years, meaning with [greater] frequency as opposed to every five years,” says Behrman. “[It’s] every couple of years, depending on the data that we’re seeing within our plan, but we have really good overall plan participation, so the need to do auto-sweeps in the future may go back to being less frequent.”

“What we have seen is very few people—about 10% to 15%, on average in 2019—opt out, so we have very few people who actually go back in and say, ‘No, I want to reset myself back to not contributing or [contributing] at a much lower level,’” Behrman adds.

BorgWarner also changed its plan design in 2019 to increase the default contribution rate for a re-enrolled worker to 2% from 1% and boosted the cap for auto-escalate to 15% from 10%. Auto-escalate is a plan feature that annually increases participant deferral rates by 1% to 2%, up to a predetermined cap.

Just Do It

Behrman advises employers considering doing an auto-sweep to make it tangible for employees to understand the effects over time.

“It’s a matter of communicating and giving people like me samples, giving some scenarios for folks to say, ‘OK, here’s what our average earner makes, here’s what the impact [is], and what the net impact to [a worker’s] paycheck would be by just making this incremental change,’” she says. “Then [it’s] really promoting the tools and resources available for people to model what their retirement rate may like may look like.”

Bobilya-Feher adds that employers do not have to jump directly into the deep end. Every employer is different, and therefore, the decision to incorporate any plan design depends on the employee population, she says.

“For us, it was about getting over not being courageous, because we started to do it [at a low amount],” Bobilya-Feher says. “We felt our population was sensitive—especially with heavily hourly or heavily blue-collar [workers]. Start incrementally: You have to talk through those dynamics about your population and work through those hurdles.”

Ultimately, the employer has the choice to incorporate a progressive and powerful retirement plan designed to boost worker contributions.

Having gone through the process, Bobilya-Feher likes to tell other plan sponsors: “Be brave [and] ready to jump off the cliff. Just do it, go for it,” she says. “Once it got to the other side, and [we] started seeing our results, [we realized,] ‘Why did we wait so long? Why did we debate it so much?’”