“Anemic” default contribution rates among defined contribution plans using automatic enrollment stand in stark contrast to what plan executives consider optimal savings rates, a survey by the Defined Contribution Institutional Investment Association has found.
Although automatic enrollment “has significantly boosted participation, and employees view it as a distinct benefit,” the DCIIA report on the survey of 101 plans said “many plans' automatic features are not designed to drive contribution rates high enough to secure participants'retirements.”
The survey results show a big difference between what executives say and what they do. For example, the survey found that 87% of the respondents said the optimal savings rate for participants was 10% or more before any company match. Yet among the 44 plans in the survey employing automatic enrollment, 55% set a 3% default rate; another 7% of respondents were even lower.
“Clearly, there is a disconnect between what sponsors say is the optimal savings rate and what their default rate is,” said Catherine Peterson, the principal author of the DCIIA report, in an interview. Ms. Peterson is the New York-based vice president and director of retirement insights for J.P. Morgan Asset Management and a member of the DCIIA research committee.
Equally troubling were responses by the 57 plans that didn't use automatic enrollment. Sixty-five percent said it was “very unlikely” they would offer this option in the next 12 months, while 19% said it was “somewhat unlikely” they would offer automatic enrollment, according to the report, which was issued March 14.
Ms. Peterson said the primary reason plan executives gave for not offering automatic enrollment was an already high participation rate by employees. However, the DCIIA survey didn't ask — and respondents didn't provide information about — what is considered a high participation rate.
Another top reason for not offering auto-enrollment was the belief by plan executives that it was “too paternalistic” and that employees would be upset by it, she added. Other reasons for not offering automatic enrollment included beliefs that it would be “inappropriate in the current economic environment” or too expensive, according to the report on the survey.
In addition to low default rates, the DCIIA survey also found that many plans using automatic enrollment weren't including all of their employees in that feature.
Although “most plans don't conduct ongoing periodic automatic enrollments for existing employees,” the survey found 39% of the plans with automatic enrollment have performed a one-time sweep of existing non-participants into their plans.
“With an emphasis on automatic enrollment for new hires only, it may take certain companies years before the full impact of automatic enrollment plays out in terms of significantly higher DC plan participation levels,” the survey report said.
Employers with defined benefit plans and those without corporate matches for their DC plans were less likely to enroll participants automatically, the report said.