Defined contribution plans aren't moving fast enough, far enough or comprehensively enough to add some best-practices features such as automatic enrollment and automatic escalation, according to a new survey of plan executives by the Defined Contribution Institutional Investment Association.
“What we've seen from sponsors is that they understand the issues,” said Catherine Peterson, vice president and director of retirement insights for J.P. Morgan Asset Management (JPM), New York, and primary author of the DCIIA survey. “They are attempting to do the right thing to raise saving rates, but there's a difference between what they believe and what they can do.”
DC plan executives have lofty goals for their participants, with 20% saying their optimal annual savings rate should be more that 15%, while 19% say the rate should be 14% to 15% and 39% advocate 10% to 13%.
But those executives don't always back those words with actions, Ms. Peterson noted. The most-offered default rate in auto-enrollment programs remains the traditional 3%, a rate the DCIIA survey said could be increased to help participants achieve higher retirement savings.
The survey also illustrated very little improvement in plans offering auto-escalation programs compared to a similar DCIIA survey in 2010. In both surveys, an overwhelming majority of plans with auto escalation used a 1% annual increment.
Still, Ms. Peterson said she saw some encouraging signs in the latest survey, conducted in March and April and released Dec. 10, whose highlights include:
- Auto enrollment is offered by 56% of plans vs. 44% in the previous DCIIA survey.
- The average participation rate among plans with auto enrollment was 81%, compared with 69% prior to offering auto enrollment.
- Auto-enrollment deferral rates increased slightly from the traditional 3%. For example, the percentage of plans with a deferral rate of 4% or higher was 47% in the current survey vs. 39% in the previous DCIIA survey. The percentage of plans with the 3% deferral dropped to 47% from 55%, while the percentage of plans with deferral rates below 3% remained constant in both surveys at 7%.
- The percentage of plans using auto escalation as a default option in conjunction with automatic enrollment rose to 19% from 15%.
Plans cited familiar reasons for their sluggish action on best practices in the current DCIIA survey. Some of the more common ones include a fear that participants will opt out, complain about corporate paternalism or cut back on their savings, Ms. Peterson said. “With the plans that are more aggressive (in promoting best practices), we're not seeing that reaction,” she added.
Other reasons cited by plan executives include concern about the cost of implementing auto enrollment and/or auto escalation or the assertion that participation rates are sufficiently high, said Suzanne van Staveren, vice president and chief operating officer of the defined contribution business at Goldman Sachs Asset Management, New York. She is chairman of DCIIA's research committee and an author of the survey.
“Sponsors also said they were concerned about putting an economic burden on participants in this economic environment,” she said.
However, some concerns cited by plan executives for not acting or acting cautiously are contradicted by some of the survey's findings, Ms. Peterson said.
For example, 62% of executives in plans offering auto enrollment reported opt-out rates of less than 10%, while 67% of executives in plans with auto escalation reported opt-out rates of less than 10%.
“When it comes to opt-out rates, actions speak louder than words,” Ms. Peterson said. “If participants were upset, there would have been more opt-outs.”
Ms. van Staveren said the biggest surprise — and disappointment — was the meager change in plans using auto escalation — 47% vs. 46% two years ago. And even though the combined use of auto enrollment and auto escalation among plans rose to 19% from 15%, she said too many plans fail to take advantage of this opportunity to raise participant outcomes.
The survey found that 88% of plans that use auto escalation provide a 1% annual increase, while in the previous survey 89% of plans offered the 1% increase.
Although more plans are using auto enrollment, resistance remains “surprisingly high,” according to the survey. Among plans not offering auto enrollment, 69% of executives said they were very unlikely or somewhat unlikely to offer it in the next 12 months — down from 84% in the previous survey.
Thirty percent said they were very likely or somewhat likely to offer this feature in the next 12 months vs. 16% in the previous survey. The most common reasons for inaction were plan executives' beliefs that participation rates were sufficiently high and that auto enrollment was too paternalistic, the survey said.
The survey of 118 plan executives was conducted between early March and early April 2012 covering a mixture of plan sizes — 40% had more than $1 billion in assets, 22% had between $100 million and $1 billion, and 38% of the plans had less than $100 million in assets.
This article originally appeared in the December 10, 2012 print issue as, "Plans aiming high, shooting low on best practices".