Improving their plan designs, defined contribution plan executives are making progress in addressing a continuing conundrum among DC plan savers – the average contribution rates for participants who are automatically enrolled remain lower than the average for those who enroll voluntarily. "Sponsors are getting smarter," said Jean Young, senior research analyst at Vanguard Group's Center for Investor Research, referring to contribution-raising practices such as higher initial deferral rates for auto-enrolled participants, greater use of auto escalation in plans and higher contribution caps on auto features. "This is huge that the rates are converging."
Among plans for which Vanguard is the record keeper, for example, the average deferral rate for voluntarily enrolled participants was 7% of salary in 2009 vs. 4.8% for auto-enrolled participants, according to Vanguard's recently published annual report, How America Saves.
For the former, the average deferral rate crept up in subsequent years to 7.3% in 2015. For the latter, the rate grew almost steadily during that period to 6.7% for 2015.
Last year, the average deferral rate for the voluntarily enrolled group was 6.3% vs. the automatically enrolled group average of 6.1%. Ms. Young attributes the dips in both groups' deferrals to Vanguard having added a number of retailers as new clients, whose employees traditionally have lower wages.
Ms. Young said the closing of the voluntary-automatic gap is due, in part, to DC plans raising their initial auto-enrollment deferrals beyond the traditional 3%. Last year, 48% of Vanguard clients offering auto-enrollment had initial deferral rates of 4% or higher. In 2009, it was 27%.
Last year, Vanguard clients' plans offering auto-enrollment had a 90% participation rate vs. a 63% rate for plans without auto-enrollment. Plans with automatic enrollment "have higher participation rates across all demographic variables," the report said.
However, average deferrals among participants in auto-enrolled plans can be suppressed or discouraged by participants' inertia or by plan design.
For example, a participant who is auto-enrolled at 3% might not add to that annual contribution. Or, a plan that auto-enrolls participants at an initial deferral rate below the company match is allowing those participants to leave money on the table.
Also, a plan that doesn't offer auto escalation runs the risk of participants' inertia keeping them at a lower-than-optimal savings rate. A plan that uses an opt-in strategy for auto escalation (participants must choose to join) vs. an opt-out strategy (participants must choose to drop out) ignores behavioral finance research about individuals' motivation.