Data & Research June 12, 2012

Higher Default Deferrals Linked to Fewer Opt-Outs

Default deferral rates in 401(k) plans with automatic enrollment led to higher participant retention, according to a study of New York Life Retirement Services’ clients.
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The analysis indicates that plans auto enrolling their participants at higher deferral rates have lower participant opt-out rates. Plans implementing auto enrollment with a default deferral rate greater than 3% have consistently experienced lower opt-out rates than plans with lower default rates, year over year. Plans with default rates of less than 4% experienced 14% opt-out rates, vs. 10% for plans with greater than 3% default deferrals for the 12-month period ending March 31.  

The study also shows plans that auto enroll participants at a rate greater than 3% of salary have a 95% overall participation rate—superior to plans auto enrolling participants with less than a 3% deferral rate, which have 88% participation on average.   

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In addition, 30% of participants in plans with default deferral rates higher than 3% proactively increased their deferral rate within a year of being auto enrolled.  The percentage of participants proactively increasing their deferral rate after being auto enrolled at higher than 3% has steadily increased since 2006, where only 13% of the population had done so. By comparison, participants enrolled at lower rates have garnered a strong but flat rate of participant engagement, ranging from 27% to 26% over the same time frame.  

“Participant engagement is one of the toughest nuts to crack, and we need to attack it on several fronts.  It isn’t about the most clever postcard or best app—it is about understanding human behavior and capitalizing on it,” said David Castellani, chief executive of New York Life Retirement Plan Services. “Success begets success. If participants are saving and accumulating assets faster, they are going to realize the value of their plan faster. We encourage our sponsors not only to auto enroll, but to push the auto-enrollment envelope as far as they can.”  

The analysis involved 480 plans and 800,000 participants across New York Life’s retirement platform. The number of plans on the New York Life platform that have adopted auto enrollment climbed to 61% as of March 31, compared with 21% in 2006.

 

Data & Research June 12, 2012

Employees Making Progress Toward Retirement Readiness

Workers are making progress in closing the gap between the money they’ll need in retirement and what they are on track to accumulate.
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Stronger market returns and continued retirement savings behaviors by employees over the past few years have helped, according to two research reports by Aon Hewitt.  

When inflation and postretirement medical costs are factored in, Aon Hewitt projects employees will need 11 times their final pay in retirement resources, such as company-provided plans and personal savings, to meet their needs in retirement beyond Social Security. Aon Hewitt’s analysis, The Real Deal: 2012 Retirement Income Adequacy at Large Companies, which examined the projected retirement levels of more than 2.2 million employees at 78 large U.S. companies, reveals that, on average, full-career contributing employees are on track to accumulate 8.8 times their final pay, leaving a shortfall of 2.2 times pay. This is a slight improvement over 2010 when the shortfall was 2.4 times pay. Employees who rely solely on a defined contribution (DC) plan to fund their retirement are making similar progress, reducing their shortfall from 4.3 times pay in 2010 to 3.8 times pay.   

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According to Aon Hewitt, two main factors contributed to closing the gap: continued savings by employees and strong return on assets. Aon Hewitt’s 2012 Universe Benchmarks report, which analyzes the saving and investing habits of more than 3.6 million U.S. employees, shows 76% participated in a DC plan during 2011. While flat recently, this rate remains at a record-high. Participation among younger workers increased by two percentage points since 2009 to 54% of eligible workers. In addition, the median annualized participant rate of return from 2009 through 2011 was 12%.  

Among factors influencing retirement income adequacy, Aon Hewitt’s research revealed employee savings rates have the largest impact. For example, if not covered by a pension plan, an employee who begins saving at age 25 and targets 11 times pay at retirement needs a combined employer and employee contribution rate of 12% to 18% of pay each year (15% on average) to build up adequate retirement income by age 65. This combined contribution rate increases if the employee does not start saving until later in life.   

The analysis shows the number of full-career contributors who can retire with sufficient retirement assets increases from 29% to 46% if they increase retirement contributions by as little as 1% each year for five years. In addition, a 1% difference in average returns over a career and retirement period can result in a two-times-pay difference in retirement resources.  

 

(Cont...)

The research did find room for improvement. The average before-tax contribution rate remains nearly unchanged, at 7.2% of pay. As a result, less than 30% of full-career employees are currently on track to achieve adequate retirement income. Passive employee behavior also is at an all-time high, with just 15% of participants initiating a trade in 2011, down from 20% in 2008 and prior years.   

The analysis shows automation tools can have a dramatic impact on saving and investing behaviors. The participation rate among those subject to automatic enrollment is 83%–18 percentage points higher than those employees who are not defaulted. Employers that offer automatic enrollment have 15% more employees on track to meet their needs in retirement than employers that do not offer automatic enrollment. Similarly, 53% of employees who are enrolled in automatic contribution escalation programs are expected to meet their financial needs in retirement, compared to just 26% of those who are not.   

While automation has played a strong role in helping employees’ saving behaviors, the research shows it also can be potentially detrimental if it is not leveraged effectively. Employees who are automatically enrolled in their DC plan have an average savings rate of 6.7%, which is a full percentage point below those not subject to automatic enrollment. Additionally, these workers are much more likely to miss out on employer matching contributions. Thirty-nine percent of automatic enrollees save below the match threshold versus just 25% of other savers.   

The Real Deal research report can be downloaded here. Aon Hewitt’s Universe Benchmarks report is available at this site.

 

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