Defined contribution plan executives are wrestling with ways to improve participants' savings through automatic escalation.
The struggle is between two philosophies: the opt-in approach, which requires participants to make a commitment to automatically raise their savings rate annually; and the opt-out approach, which includes participants in auto escalation unless they tell plan administrators to remove them from the program.
Most defined contribution plan experts say the opt-out approach is the best way to improve retirement savings when combined with auto enrollment.
Although opt-out is gaining, some surveys show opt-in either dominates or still represents a large percentage of auto-escalation policies in DC plans.
“In conversations I've had with record keepers, they say a very high percentage of participants stick with auto escalation on an opt-out basis and a relatively low percentage of participants take up auto-escalation if they have to opt in,” said Lew Minsky, the Jupiter, Fla.-based executive director of the Defined Contribution Institutional Investment Association, who supports the opt-out strategy.
A recent study by Principal Financial Group, Des Moines, Iowa, found that when participants were given a choice to opt-in for auto escalation, only 6% did so. T. Rowe Price Retirement Services, Baltimore, reported that 10.5% of participants in client plans offering automatic escalation via opt-in programs chose to participate.
Among those with opt-out auto escalation, 86% of participants stayed with annual increases, Principal said. At T. Rowe Price, 69% continued with the program.
“We say let inertia work for you,” said Francisco Negron, head of client services at T. Rowe, which encourages opt-out programs in conjunction with auto enrollment.
Among clients that offer auto enrollment, Mr. Negron said the opt-out auto-escalation approach rose to 33.6% last year vs. 22.4% in 2009. However, opt-in plans still outnumber the opt-out plans by a 2-to-1 margin.
DC plan executives are slow to accept opt-out methods for fear employers will appear excessively paternalistic, Mr. Negron said. In addition, they worry about cost and that participants will drop out of the auto-escalation program, he said.