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.

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.   

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.