Many employers add auto escalation to their 401(k) plans but Indiana University Health took it one step further: The nonprofit healthcare system studied different employee population groups to assess racial disparities in retirement readiness, an effort that not only justified the auto-escalation measure but also won IU Health an Excellence & Innovation Award.
“When we started looking through that lens of disparity in retirement outcomes, we found some disturbing but also really good information,” said Josh Rabuck, chief investment officer of IU Health and one of the winners of the team award.
The data showed that the system’s American Indian, Pacific Islander and Black American populations lagged the average employee in retirement readiness, a metric that measures an individual's ability to replace 75% of projected income at age 65 through anticipated life expectancy. Only 75% of Black Americans, for example, were on track to achieve retirement readiness, four percentage points behind the 79% of the overall population that was on track.
With auto escalation, the disadvantaged groups would get more of a bump in their retirement readiness than the workforce would get as a whole, Rabuck said.
For example, Black Americans would improve their retirement readiness by 4 percentage points, whereas the total workforce would get a boost of approximately 3 percentage points.
“This feature would get 4% more of our Black, or African-American teammates over the retirement readiness goal line vs. the 3% improvement for the overall population,” Rabuck said. “Once we saw the impact that auto-escalation would have on fast-forwarding certain populations within IU Health, that was the final push that said this makes total sense to do this,” Rabuck said.
IU Health implemented an auto-escalation feature that automatically increased employee deferral rates by one percentage point annually, up to 12%.
The team also looked at disparities within different divisions and found even greater inequalities.
Of the 10 divisions evaluated, some had workforces that were less than 70% retirement ready.
With auto escalation, these divisions would improve their retirement readiness, with one division expected to “get 6% more teammates across the retirement readiness goal line," Rabuck said.
Despite the strong numbers, some members of the retirement plan committee were still skeptical of the auto-escalation measure, saying plan participants who lived paycheck to paycheck would object.
Their reservations, however, subsided as committee members learned that the auto escalation would occur at the same time that employees received their annual pay increases, a move that would “take the sting out” of the higher deferral rates, Rabuck said.
The retirement plan committee also drew comfort from the fact that participants could always opt out.
“Participants can always shut that off if they want to,” Rabuck said, referring to auto escalation.
It’s still too early for IU Health to track the impact of auto escalation on workforce retirement readiness as the feature was only implemented in July, but one indicator seems promising.
Opt-outs have been low, at less than 14%, Rabuck said.
Participants also haven’t complained, providing IU Health with another hopeful sign.
“It’s been quiet, which I think means it’s a good thing,” Rabuck said.
