Aon Hewitt's research shows that two-thirds of plans with auto enrollment set the default deferral rate at 3% or less. At The Vanguard Group Inc., Malvern, Pa., 73% of plans in Vanguard's universe that offered auto enrollment had default rates at 3% or less. At Fidelity, 77% of plans in Fidelity's database have a 3% default rate for auto enrollment.
“Employers are starting to understand that if you need a 10% to 15% (annual) deferral rate, you have to set the default rate higher than 3%,” Fidelity's Ms. McHugh said.
Vanguard's research shows “there isn't a significant difference” in opt-out rates among participants deferring 3% of pay vs. those contributing 6%, said Jean Young, senior research analyst. Plan executives “need to get comfortable that higher default rates don't mean higher quit rates.”
The latest Vanguard data also show the average deferral rate among participants in plans with auto enrollment was 6.3% in 2010 vs. 7.4% for participants with voluntary enrollment. The statistics are based on the company's record-keeping data for more than 3 million participants in more than 2,000 qualified DC plans.
Vanguard said this gap was consistent among five income categories and six age categories. The gap also was present among five job-tenure categories and five of six account balance categories. (Only participants with account balances of $250,000 or more had higher deferral rates for auto enrollment than voluntary enrollment).
Vanguard found the average deferral rate for all participants — auto-enrolled and voluntarily enrolled — in plans for which the company is record keeper has been sliding since peaks of 7.3% in 2006 and 2007, reaching 6.8% in both 2009 and 2010.
Fidelity's data showed the percentage of plans with auto enrollment rose steadily to 19.2% by year-end 2010, from 2.4% at year-end 2006. During that same period, the average deferral rate for active participants dropped to 8.2% from 8.9%, according to records of 11 million participants in 17,000 401(k) plans for which Fidelity was record keeper.
Encouraging higher savings rates can be thwarted by participant inertia, said J.P. Morgan's Ms. Peterson. When a sponsor sets a default rate for auto enrollment, “some people think it's guidance from the company,” she said.
She said plan executives need to continually communicate with employees, raise the default rate in auto enrollment to the corporate match rate and provide an auto-escalation rate of 2% per year. The goal is to “reach at least a 10% savings level as rapidly as possible,” she said.
Despite the frustrations, those interviewed said it's better to have auto enrollment encouraging employees to save something than to have employees saving nothing.
“These are the good guys,” said Vanguard's Ms. Young, referring to companies with DC plans and auto enrollment. “Could they be better guys? Yes. But about half of private-sector workers work for employers that don't sponsor retirement plans.”