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Data & Research May 18, 2011
Auto Enroll Default Should be Increased, Principal Reports
The Principal Financial Group found that plans who start auto-enrollment at a 3% deferral rate have a lower average deferral rate than plans without an automatic enrollment feature.
Reported by PLANADVISER staff
Client data from The Principal shows that plans with an automatic enrollment feature defaulting at 3% produce an average deferral of 6.3% – lower than the average deferral of 6.8% for plans without an automatic enrollment feature. In contrast, the average deferral is 7.1% for plans that have a 6% default automatic enrollment feature.
Automatic enrollment significantly boosts participation in retirement plans, the data shows. There was a 20% increase in participation in plans with an automatic-enrollment feature compared to participation in plans without the feature. In addition, automatic enrollment at 6% only increased opt outs by 4 percentage points (19%) over the 3% automatic-enrollment deferral rate (15%).
“Automatic enrollment is a powerful tool to encourage better retirement savings behavior, but we’ve found that most plan sponsors tend to set their default at what we believe is an insufficient level,” said Barrie Christman, vice president of individual investor services at The Principal.
For plans with an employer match contribution, nearly twice as many participants (61%) reach an overall savings rate greater than 11% when their employers’ plan defaulted them at 6% rather than 3% (32%). Twenty-eight percent of participants in plans with a stated employer match but without automatic enrollment save 11% or more.
Christman added that implementing an auto-escalate program, which automatically increases participants’ deferral amounts by certain percentages over set amounts of time, along with automatic enrollment is another way for plan sponsors to help participants reach their retirement savings goals. “Our data supports coupling the two programs to achieve the most successful plan design, especially if the automatic enrollment default rate is lower,” she said.