Auto Features Need Robust Defaults

When it comes to using automatic features for defined contribution (DC) plans, employers should understand the importance of robust defaults for helping employees save for a secure retirement.

A newly released Defined Contribution Institutional Investment Association (DCIIA) white paper titled “Best Practices When Implementing Auto Features in DC Plans” explores how automatic features, such as auto enrollment and auto escalation, can be structured to help DC plan participants amass enough savings to reach an effective replacement ratio in retirement.   

Academic research has long supported the view that, because of employee inertia when it comes to DC plans, automatic enrollment can increase participation among difficult-to-reach employees. At the same time, research shows that inertia can cut two ways: While it is good news that employees remain in the plan once auto enrolled, on the other hand, inertia can also cause them to remain at the auto enrollment defaults.   

Examples of best practices when implementing auto features, according to DCIIA, include auto enrolling all current and future employees into the plan; setting the initial deferral percentage at no less than 6%; and employing an auto escalation increase of 1% or 2%, to a maximum of no less than 15%.   

The white paper includes case studies that explain how three corporate DC plan sponsors are implementing auto features in more robust ways, improving their DC offerings for participants. The paper can be downloaded from here  

The paper is part of a series of research projects focused on improving outcomes in defined contribution plans that the DCIIA is developing. (See “DCIIA Supports Alternative Investments” and “Designing a Better DC Investment Menu”)