As more money flows into defined contribution plans, executives are taking steps to encourage participants already covered by the plans to contribute more money, more often through automatic features, according to results of the Pensions & Investments annual survey of the largest U.S. retirement plans.
Among plans that responded to questions about auto features, 46 of 82 DC plans said they offered auto enrollment during the 12 months ended Sept. 30. In the year-earlier survey, 40 of 81 plans offered auto-enrollment.
The use of auto escalation grew, too, even though adoption rates are lower than for auto enrollment. In the latest survey, 28 of 79 plans said they offered this feature vs. 23 of 77 in the previous survey.
More plans also offered both auto features — 22 in the latest survey vs. 19 in the previous survey.
“There's been more interest” in both auto enrollment and auto escalation, said Christopher Lyon, a partner at Rocaton Investment Advisors LLC, Norwalk, Conn., adding that some DC plan executives are trying to enhance their plans' auto features.
For example, some Rocaton clients are considering raising the auto-enrollment default rates above what has become the traditional 3% of annual salary. “A lot is in the talking stage, but we see signs of up to 6%,” he said.
Although clients offering auto escalation are sticking with the 1%-of-salary-per-year approach, “we see more embracing the concept,” he said. Most clients' auto features policies allow a total contribution of up to 10% of annual salary for participants.
Amy Reynolds, a Richmond, Va.-based partner and U.S. defined contribution consulting leader for Mercer LLC, said clients are offering higher default rates and re-enrollment of participants who don't contribute much.
Although auto enrollment “gets participants into the plan,” some employers are looking at improving participation through a targeted use of auto features, she said. Some plan executives are examining the use of those features based on factors such as plan demographics and whether an employer doesn't have a defined benefit plan.
Auto features are helpful because “just showing a replacement ratio can scare the heck out of some people and they do nothing,” said Jeffrey Levy, managing partner of Cammack Retirement Group, New York.
As more research shows participants need to save 12% to 15% of salary each year to achieve retirement readiness, auto features provide at least a start to reaching these goals, he said. Most of his clients are 403(b) and 457 plans, and most clients' auto features — auto enrollment plus auto escalation — enable a 6% savings rate, although a few clients are moving up to 10% to 15%.