Defined contribution plans with combined automatic enrollment and automatic escalation have higher contribution rates than those with auto enrollment alone, but self-enrolled participants have higher contribution rates than either group, according to research released Tuesday by Mercer.
“You can’t just rely on automatic features and call it a day,” Dave Tolve, U.S. retirement business leader for Mercer’s outsourcing business, said in an interview.
Based on records of 1.2 million participants for whom Mercer administers DC plans, the firm found that the average contribution rate for participants who were automatically enrolled was 3.5%. The rate rose to 4.4% when auto enrollment and auto escalation were combined. However, the average contribution rate for self-enrolled participants was 8.5%.
The average contribution rate of self-enrolled participants whose plans offered auto-escalation was 7.4%. Among plans administered by Mercer that offer auto-escalation, 34% don’t offer auto-enrollment.
Mercer clients’ most common default contribution rate for auto enrollment is 3%.
Sponsors must continue to communicate with and educate employees so that they increase their savings rates, Mr. Tolve said. Seventy percent of automatically enrolled participants in the Mercer DC universe don’t change their contribution rate.
“We all know inertia is a bad thing in defined contribution,” he said.