New this year, per the U.S. Department of Labor, is the ability for employers nationwide to auto-enroll employees in disability insurance coverages for ERISA-covered plans.
The implications of this decision are far reaching and merit serious consideration by employers offering disability benefits, which are designed to prevent income disruption in the event of a qualifying disability. (As with other auto-enrollment options such as 401(k) contributions, employees retain the opportunity to opt-out if they choose not to take the coverage.)
For those employers who don’t yet offer disability coverage, we strongly encourage you to read our blog post from earlier this year on why disability insurance is one of the most valuable benefits you can offer.
The Gap Between Interest and Action
At present, one in four 20-year-olds in the workforce can expect to be out of work for at least a year before they reach retirement, due to a disabling condition - that’s according to probability tables developed by the Social Security Administration.
Yet despite this risk, American workers are woefully ill-prepared should they experience even the slightest income disruption. According to the American Payroll Association, 71 percent of Americans would find it “somewhat difficult” or “very difficult” to meet their financial obligations if their paycheck were delayed by just one week. The 35-day Federal government shutdown earlier this year is testament to this, as countless affected government personnel struggled to make ends meet when paychecks were stalled.
And while 88 percent of Americans think that employers should offer some form of disability insurance, only 42% of employers actually offer short-term disability while even less, 34%, offer long-term disability coverage.
More concerning is the fact that only 26% of workers actually sign-up for disability coverage, pointing to a significant gap between the desire for this benefit and the action taken when offered it.
That’s why this recent ruling by the US Department of Labor to expand auto-enrollment programs to disability insurance plans is such good news for employees and employers alike.
How Auto-Enrollment and Nudge Theory Increase Participation
According to Kaiser Health News, employers that auto-enroll employees in voluntary long-term-disability plans may get as many as 75 percent of employees to participate, compared with 26 percent for employers that leave it completely up to workers. (Of course these rates will fluctuate based on age of employee, share of benefit cost covered by employer, and the quality of disability benefit.)
This nearly 300% increase in disability enrollment comes as no surprise to anyone familiar with “nudge theory”, a concept in behavioral economics which promotes, amongst other things, the use of pre-checked options as a way to influence consumer purchasing/selection behavior.
Popularized for the masses in his 2009 book “Nudge: Improving Decisions About Health, Wealth, and Happiness”, Richard Thaler, a University of Chicago professor and Nobel Prize winner in economics, recommended automatic enrollment policies as a best practice in 401(k) plan design. (In truth, he’d actually been making the recommendation since 1994.)
As his recommendation became more well known, participation rates in 401(k) plans took off. According to a Vanguard study of clients using their services, participation rates improved substantially from 2007 to 2016, attributable to a broader adoption of auto-enrollment. In 2016 alone, employees in plans with auto-enrollment had a 90% participation rate compared to 63% for employees hired under plans without the feature.
Auto-enrolling employees into disability plans protects employees who don’t always realize they need protection until it’s too late. By deploying this enrollment strategy, employers are subtly telling employees that disability coverage is important – and highly recommended. It not only serves to encourage and reassure the enrollment decision, but also helps to stem enrollment regrets down the road when coverage is needed.
The Upside for Employers
While it’s rather obvious how disability insurance provides tremendous upside to an employee, what’s less obvious are the benefits to employers.
For starters, implementing a disability auto-enrollment program is a great way to boost financial wellness. After all, worker’s compensation only covers work-related illnesses and injuries, while the basic disability coverage provide through Social Security is so strictly defined that just 35% of claimants receive the benefit. Offering short-term and long-term disability insurance - and auto-enrolling your workforce - adds considerable coverages to close these gaps in income protection.
Second, disability insurance is highly valued across all demographics in the workforce. For Baby Boomers and Gen Xers, disability insurance helps protect retirement savings, while for Millennials and Gen Z, they are likely to be earning less than their more mature coworkers, and are therefore less likely to have money set aside for emergencies.
Finally, employers who enroll more of their workforce in disability insurance are spared from having to face incredibly difficult decisions when an uninsured employee can’t work because of a debilitating illness or injury. We’ve yet to meet an employer who doesn’t wring their hands at the thought of having to wrestle with the best way to deal with an uninsured employee in a compassionate but fiscally responsible manner.
Communication is Key to Implementing Default Enrollment
As with any change in benefits and enrollment practices, employee communication is critical to introducing auto-enrollment strategies.
While pre-selecting this benefit during the enrollment process will no doubt increase enrollment, you’ll also want to minimize opt-outs, though that should never be done by making the process of deselecting something cumbersome and difficult. Rather, it should be done through education.
Make sure to educate your workforce on the value of disability insurance, the limitations of other coverages (e.g. worker’s comp and social security), and the sobering facts regarding just how many people will actually need this safety net at some point prior to their retirement.
If you have any additional questions about benefits auto-enrollment contact your benefits broker right away.