Defined contribution plan participants are more willing to accept aggressive auto-escalation policies than sponsors are willing to provide, according to a report from Northern Trust, published Monday.
On the one hand, many plan sponsors currently automatically enroll participants at 3% of annual pay and offer auto escalation so the total deferral rate reaches 5% or 6% of annual pay, the report said. One the other hand, participants said they are willing to go much higher.
Participants were asked if their employer auto-escalated their contributions at 1% per year, what would be the top level they would accept before refusing any further increase. One-fourth said they were willing to go as high as 15% or more of annual salary. Another 13% said they would accept 11% to 14% of salary, and another 20% said they would be comfortable with 10%.
“This was one of the most pleasant surprises of the survey,” said Susan Czochara, senior vice president and managing director for defined contribution solutions, in an interview. Northern Trust recommends that participants in a DC plan save 13% to 15% of pay each year, utilizing plan designs such as auto enrollment, auto escalation and a corporate match.
Ms. Czochara said DC plan executives have been reluctant to pursue more aggressive auto features for a variety of reasons ranging from concerns about the cost of implementation to interfering with personal choice to the impact on lower-paid employees. However, the survey found 41% of employees earning less than $30,000 annually said they would be willing to contribute 10% or more of annual pay to their retirement plans.
Participants also appeared evenly divided over whether their plans should simplify their investment menus.
When asked their opinion of their employer reducing investment menus to five well-diversified options and a series of target-date funds, 29% said they would strongly favor or somewhat favor the change, the report said. But 30% said they would strongly oppose or somewhat oppose this policy. Forty-one percent said they were neutral.
The responses among participants earning less than $30,000 a year tilted a bit more toward greater simplicity with 33% favoring the change, 16% opposing it and the rest staying neutral.
However, Ms. Czochara said she was encouraged by the results, noting that Northern Trust interpreted a neutral stance by participants as “being open to” investment lineup simplification. A March Northern Trust survey of 100 DC clients showed an average of 12 investment options in their plans.
Monday’s report on participants was based on a national survey of 1,007 people between the ages of 25 and 70 who have a 401(k) plan through their current employer. The survey — which wasn’t restricted to Northern Trust clients — was conducted in October by Greenwald & Associates.