Auto Deferral Increases Make a Difference

An analysis from Mercer finds participants who were automatically enrolled in their plan and participate in an automatic contribution increase program have are contributing more than those who do not.

Automatically enrolled participants who also participate in an automatic contribution increase program have a 25% higher contribution rate than those who do not use automatic deferral increases. Their average contribution rate is 4.4%, compared to 3.5% who don’t have deferrals automatically increased.  

However, Mercer found the opposite to be true for self-enrolled participants. Those who had deferrals automatically increased had an average contribution rate of 7.4%, while those who did not use automatic escalation had an average deferral rate of 8.5%.  

“Clearly, it is important for plan sponsors to understand the difference in behavior and engagement between self-enrolled and automatically enrolled participants,” said Dave Tolve, U.S. Retirement Business Leader for Mercer’s Outsourcing Business.“Those who self-enroll and set their own contribution rate are contributing nearly two and half times those who are automatically enrolled. While automatic enrollment obviously increases overall plan participation, it does little to overcome the inertia of unengaged employees. While further enhancing DC plans with automatic increase features does drive increased savings, there is no comparison to the contribution and account values of actively engaged participants who consciously make retirement savings decisions.”    

The analysis was based on the behavior of 1.2 million participants for whom Mercer administers defined contribution plans as of December 31, 2010.