Automatic Enrollment Could Bolster Funds
September 4, 2000
If new employees were automatically enrolled in 401(k)'s, mutual fund companies might collect assets from the 15 percent of the population that fail to sign up for 401(k)s, fund executives and consultants said.
But doing so is a gamble, because the main reason people do not contribute to 401(k)'s is that they are low wage earners, and mutual fund companies do not want the expense of servicing small accounts, said Ted Benna, founder of the 401(k) and now president of 401(k) Association, a consulting company in Bellefonte, Pa.
"There's the possibility that someone might contribute two times to a 401(k) and then drop out, leaving a balance of as little as $100 for a fund company to carry, for years, even," Benna said. "No fund company wants that expense."
However, if a fund company and plan sponsor convey the reasons for setting up 401(k)'s in a compelling manner, they might win over new customers, said John Rekenthaler, research director at Morningstar of Chicago. Young workers with bright futures in certain industries, including technology and health care, would be the most appealing audience to attract, Rekenthaler said.
"Automatic enrollment could provide fund companies with a lot more customer relationships," Rekenthaler said. The assets these participants would contribute at first would undoubtedly be minimal, he said.
"But if the fund companies cultivated these customers over time, these people could become prime customers," Rekenthaler said. "All they need is seasoning, like a bottle of wine. And if you get them early, you get them for life."
Automatic enrollment is not very common, however. Only seven percent of plan sponsors automatically enroll new employees in 401(k) plans as of the end of last year, according to Hewitt Associates of Lincolnshire, Ill. That is a slight increase from 1997 when four percent of plan sponsors automatically enrolled new employees, Hewitt said.
Firms that automatically enroll new employees tend to contribute a minimal amount of employees' salaries - around three percent - into conservative instruments, according to Hewitt.
While automatic 401(k) enrollment is not widespread, it is certainly growing and is likely to continue to catch on since the Department of the Treasury is encouraging it through revenue rulings, Benna said.
The IRS first approved automatic 401(k) enrollment in 1998, said a spokesperson for the Treasury Department. The IRS issued a subsequent ruling earlier this year clarifying regulations regarding automatic 401(k) enrollment, the spokesperson said.
In addition, Alexis Herman, the secretary of labor, and Lawrence Summers, the treasury secretary, issued a joint statement in July endorsing automatic enrollment as a method of encouraging people to save for retirement.
In fact, the Profit Sharing/401(k) Council of America of Chicago expects the number of companies using automatic enrollment to double annually over the next five years, said David Wray, president of the council. If growth is as strong as the council projects, nearly all employers will have automatic enrollment by 2005, Wray said.
Eighty-five percent of U.S. employees eligible for their company's defined contribution plans participated as of the end of 1998, according to the Profit Sharing/401(k) Council of America. (MFMN 6/14/99)
Fund companies would have a strong motivation to encourage plan sponsors to offer automatic enrollment if, by doing so, they could get 15 percent of non-plan participants to sign up for 401(k)'s, said Lori Lucas, a defined contribution consultant with Hewitt.
But, at least one analyst disagreed. Fund companies do not need automatic 401(k) enrollment to increase employer-sponsored defined-contribution inflows, which are already growing steadily, said Steve Cummings, an analyst with Financial Research Corporation of Boston.
"We don't think it [automatic enrollment] is a big deal for fund companies," Cummings said.