Service providers and defined contribution consultants say DC plans are slowly — albeit too slowly — chipping away at the traditional 3% default rate for automatic enrollment.
Although not fixed by law, the 3% figure has become the de facto standard default for auto enrollment of DC plan participants, a figure experts say is too low to help people achieve satisfactory retirement savings rates.
“We're starting to see stronger plan designs” concerning auto enrollment deferral rates, said Jean Young, senior research analyst for the Vanguard Center for Retirement, a unit of Vanguard Group Inc., Malvern, Pa.
Last year, 51% of Vanguard's record-keeping client plans that offer auto enrollment used a 3% default. That percentage has been declining almost steadily since a peak of 60% in 2008. Meanwhile, 35% of the plans with auto enrollment provided default rates of 4% or more last year, representing a steady increase from the 25% in 2008.
“There's still clearly work to be done” to achieve higher levels, Ms. Young said.
“If you set the default at 3%, a majority (of participants) will stay at 3%,” said Francisco Negron, head of client services for T. Rowe Price Retirement Plan Services, Baltimore. “We say you should set the default (at the rate) that maximizes company contributions.”
Among plans for which T. Rowe Price is record keeper, 8% is the highest default for auto enrollment. The average was 3.88% last year, up from 3.5% in 2007. “We have had some success,” he said. “We encourage them to set the default higher.”
Among its clients, Fidelity Investments, Boston, said the 3% deferral group accounted for 58% of plans offering auto enrollment last year and the more-than-3% group represented 27%. By comparison, at the end of 2008, those figures were 62% and 21%, respectively.
Donna Norwood, Fidelity's senior vice president for defined contribution products, expressed concern about plans that set the auto-enrollment default rate below the maximum corporate match rate. For example, if the default is 3% and the match is up to 5% or 6% of pay, “people are leaving money on the table,” she said.
The latest survey by Aon Hewitt, Lincolnshire, Ill., found 58% of plans offering auto enrollment set the initial default rate below the corporate match threshold in 2013. (Thirty-six percent set the default rate at the match and 6% set it above the match.)
The survey also found some DC plans are increasing default rates for auto enrollment. Last year, 39% of plans offered a default of 4% or more vs. only 17% in 2005. In both years, 49% of plans had defaults of 3%.
“Employers are aware that 3% isn't enough,” said Rob Austin, director of retirement research at Aon Hewitt. “We'll see progress in moving from 3% as the economy improves.”
