Auto-enrollment disparity finally starting to converge
Improving their plan designs, defined contribution plan executives are making progress in addressing a continuing conundrum among DC plan savers – the average contribution rates for participants who are automatically enrolled remain lower than the average for those who enroll voluntarily. "Sponsors are getting smarter," said Jean Young, senior research analyst at Vanguard Group's Center for Investor Research, referring to contribution-raising practices such as higher initial deferral rates for auto-enrolled participants, greater use of auto escalation in plans and higher contribution caps on auto features. "This is huge that the rates are converging."
Among plans for which Vanguard is the record keeper, for example, the average deferral rate for voluntarily enrolled participants was 7% of salary in 2009 vs. 4.8% for auto-enrolled participants, according to Vanguard's recently published annual report, How America Saves.
For the former, the average deferral rate crept up in subsequent years to 7.3% in 2015. For the latter, the rate grew almost steadily during that period to 6.7% for 2015.
Last year, the average deferral rate for the voluntarily enrolled group was 6.3% vs. the automatically enrolled group average of 6.1%. Ms. Young attributes the dips in both groups' deferrals to Vanguard having added a number of retailers as new clients, whose employees traditionally have lower wages.
Ms. Young said the closing of the voluntary-automatic gap is due, in part, to DC plans raising their initial auto-enrollment deferrals beyond the traditional 3%. Last year, 48% of Vanguard clients offering auto-enrollment had initial deferral rates of 4% or higher. In 2009, it was 27%.
Last year, Vanguard clients' plans offering auto-enrollment had a 90% participation rate vs. a 63% rate for plans without auto-enrollment. Plans with automatic enrollment "have higher participation rates across all demographic variables," the report said.
However, average deferrals among participants in auto-enrolled plans can be suppressed or discouraged by participants' inertia or by plan design.
For example, a participant who is auto-enrolled at 3% might not add to that annual contribution. Or, a plan that auto-enrolls participants at an initial deferral rate below the company match is allowing those participants to leave money on the table.
Also, a plan that doesn't offer auto escalation runs the risk of participants' inertia keeping them at a lower-than-optimal savings rate. A plan that uses an opt-in strategy for auto escalation (participants must choose to join) vs. an opt-out strategy (participants must choose to drop out) ignores behavioral finance research about individuals' motivation.
Crucial next step
Although auto enrollment gets non-savers to contribute something, the crucial next step is to get them to increase their contributions, said James Choi, a professor of finance at Yale University, and prominent researcher of behavioral finance. Changes in plan design are the primary drivers for rising contributions among auto-enrolled participants, he said.
The impact of education and communication campaigns is "pretty small" compared to plans changing auto features policies, such as raising initial deferral rates and setting deferral rates to match the corporate match, he added. Mr. Choi also advocates simplified plan design because "those kinds of interventions are fairly effective."
Fidelity Investments, Boston, promotes a mixture of simplified plan design and stronger auto features to encourage higher deferrals among for its clients, said Katie Taylor, vice president of thought leadership.
There's still a gap between voluntarily enrolled and auto-enrolled participants, but there's less daylight between them. Among plans for which Fidelity is record keeper, the average deferral for auto-enrolled participants was 7.7% as of March 31, 2012, vs. 8.5% for voluntarily enrolled participants. Both groups' rates have grown over time – the former to 8.2% as of March 31, 2017, and the latter to 8.8%.
"More and more plans have adopted automatic enrollment and raised their (initial) deferrals above 3%," said Ms. Taylor, describing some reasons for gains among auto-enrolled participants.
Tracking yearly changes, Fidelity found that 31.5% of its plans offered auto enrollment as of March 31, 2017, vs. 22.4% in March 31, 2012. Those plans cover 67.5% of participants. Among plans offering auto enrollment, 17.7% had initial deferral rates of 6% or more as of March 31, 2017, vs. 7.8% of plans as of March 31, 2012.
"Auto enrollment is great for people who won't act," she said. "EasyEnroll is for people who are willing to engage."
Ms. Taylor was referring a service offered to Fidelity clients since October 2014 seeking to combat participants' inertia. "If it's not an easy process, they tend to drop out," she explained.
EasyEnroll is a web-based – or phone app-based — feature that enables participants to select from among three choices for an annual savings rate of 8%, 10% or 12%. Selection requires just one click. Fidelity used this approach instead of giving participants an open-ended choice.
"People are not intimidated by this," said Ms. Taylor, who contrasted EasyEnroll with a "standard" enrollment practice, which "is a multistep online process that provides participants with all of the available choices to enroll in their plan."
Fidelity also has promoted auto escalation, even for plans that don't offer auto enrollment. As of March 31, 2017, Fidelity reported 16.1% of plans — covering 32.1% of all Fidelity participants — offered auto escalation. By contrast, only 10.6% of plans had offered auto escalation as of March 31, 2012 However, Ms. Taylor lamented that 74.3% of plans offering auto escalation use the opt-in method.
Alight Solutions also detects a shrinking of the gap between contributions by auto-enrolled and voluntarily enrolled participants, according to a report on DC practices to be published later this month. The average contribution among auto-enrolled participants was 6.8% in 2010, climbing to 7.4% in 2016. The average contribution for voluntarily enrolled participants was 7.8% in 2010, inching up to 8% last year, said the report that surveyed 125 clients covering more than 3 million participants.Rising initial deferrals and increasing use of auto escalation account for much of the gap-closing, said Rob Austin, the Charlotte, N.C.-based director of research at Alight Solutions, formerly Aon Hewitt.
One noticeable difference between the two groups is the fact that more voluntarily enrolled participants are getting the full corporate match compared to their auto-enrolled peers, he said.
Last year, 25% of auto-enrolled participants contributed less than what was needed to claim the full company match vs. 19% of voluntarily enrolled participants, said the Alight Solutions survey. Forty-three percent of auto-enrolled participants contributed more than their corporate match while 52% of voluntarily enrolled participants contributed more.
And when Alight checked how salary affected contribution rates, it found that voluntarily enrolled participants contributed more to their retirement plans than did auto-enrolled participants regardless of their pay.