Sixty Percent of Plans Automatically Enroll Participants

Automatic enrollment is used by the majority, 60%, of all retirement plans, according to the Defined Contribution Institutional Investment Association’s (DCIIA’s) report, “DCIIA Fourth Biennial Plan Sponsor Survey: Auto Features Continue to Grow in Popularity.”

Among larger plans, those with $200 million or more of assets, 66% use automatic enrollment, but among plans with less than $200 million, only 51% do. “Future growth in the adoption of auto enrollment will, therefore, likely come from smaller plans,” DCIIA says.

Among plans with automatic enrollment, 93% use it for all new hires. In 2010, 55% of plan sponsors automatically enrolled participants at a 3% deferral rate. By 2016, that had fallen to 32% of plan sponsors. Conversely, sponsors using a 6% deferral rate rose from 9% to 28% in that timeframe.

Fifty percent of plan sponsors use automatic escalation, and of these, 25% set it as the default, rather than ask participants to opt into automatic escalation. However, 58% of large plans use automatic escalation, compared to 40% of small plans.

Among plans with automatic escalation, the majority raise deferrals by one percentage point a year.

Less than 20% of sponsors conduct re-enrollment, which DCIIA attributes to low recordkeeper turnover.

DCIIA then examined the effects of the use of automatic enrollment and found that prior to its adoption in 2006, only 11% of plans had participation rates over 90%. By 2016, that had risen to 46%.

Only 44% of plans without automatic enrollment and escalation have savings rates of 10% or more, including both employee contributions and the company match. Among plans with automatic enrollment, that rises to 67% with savings rates of 10% or more—and when that is combined with automatic escalation, that rises to 70%.

“Moreover,” DCIIA continues, “the percentage may reasonably be expected to increase over time as more plans adopt these auto features and, since by their very nature the features become more impactful over time.”

DCIIA also notes that the opt-out rate among participants from automatic enrollment and escalation is “de minimus’’—running counter to sponsors’ fear of employee backlash.

DCIIA then tried to examine what might impede sponsors from adopting automatic features further, and discovered that slightly more than half of small plan sponsors do not think they are necessary. Forty-five percent of plans are worried about the additional cost of automatic enrollment, and 26% are concerned about the additional cost of automatic escalation.

To overcome these barriers, the industry needs to educate sponsors about the benefits of automatic features, DCIIA concludes. “Only then will the full potential of DC [defined contribution] plans be met, and will plan participants achieve the retirement security they deserve,” DCIIA says.

The findings are based on a survey of 194 sponsors that DCIIA conducted from late fall 2016 through early 2017. The report is here.