DC Group Says Auto-Deferral Rate Should be Higher

Defined contribution plans using automatic enrollment increased plan participation rates by nearly 30%, according to a study, but the contribution rate at enrollment is too low.

The Defined Contribution Institutional Investment Association (DCIIA) said the majority of plan participants in its research viewed automatic enrollment as a positive characteristic of the plan. The Association says that by increasing automatic default contribution rates and automatic contribution escalation policies, plan sponsors can measurably help their auto-enrolled participants meet retirement income needs.

“The fact that many plans’ automatic features are not designed to drive contribution rates high enough to secure the retirement future of their participants suggests that this may be the next big item on the plan sponsor agenda,” said Catherine Peterson, DCIIA Research Committee member and Director of Retirement Insights at J.P. Morgan Asset Management. “DCIIA findings support defaulting employees into the plan at the plan’s match rate and then escalating contribution rates annually 2% per year to reach a 10% or higher savings level as rapidly as possible.”

Among the findings :

  • Plan sponsors believe participants should earmark at least 10% or more of their earnings for retirement savings.
  • Of the plan sponsors that have adopted automatic enrollment, more than half have opted for a default contribution savings rate of 3%.
  • Only about one-third of plan sponsors offering automatic enrollment combine it with automatic contribution escalation, with the vast majority (89%) increasing contribution rates at 1% per year.
  • The majority of plan sponsors (70%) that have adopted automatic enrollment believe participants hold favorable views of the feature.
The poll was conducted among 101 large plan sponsors during the third quarter of 2010.