Meghan Murphy, a director of thought leadership at Fidelity Investments, tells PLANADVISER that the slowly increasing prevalence of automatic enrollment and automatic deferral escalations is still redefining the defined contribution (DC) retirement system—nearly a decade after the Pension Protection Act codified the thinking behind these innovative plan design features. The snapshot data shows 27.9% of sponsors with plans administered by Fidelity are running plans that utilize auto-enrollment, another small uptick from the previous quarter.
Use of true auto-escalation stands around 13%, Murphy adds, also a small uptick, but more than seven in 10 plans now have an optional automatic deferral escalation feature than can be activated by participants. These are impressive victories for the industry, Murphy feels, though of course, she wants to see even greater uptake.
“Another important number to point out is that for our largest plan sponsors, the rate of auto-enrollment is much higher than the industry-wide average, at about 55%,” Murphy says. “These plan sponsors cover more than 60% of all participants, so from that perspective, the penetration of auto-enrollment is pretty strong, and continues to improve.”
Numerous participants are being swept into the defined contribution system for the first time under auto-enrollment provisions, Murphy explains. This lead to the average employee contribution staying essentially flat, at about 8.1%, during the first quarter of 2015—despite the findings that more than one million participants increased their contributions (by an average of 3.5%) in the quarter and a new record average balance was set just shy of $92,000.
Murphy says the latest snapshot numbers validate the idea that, as she puts it, “you need to be auto-enrolling people with a real purpose.” One of the best moves a plan sponsor can make to promote good plan outcomes is to auto-enroll people at 5% of salary or more, she says, because participants often believe the auto-enrollment deferral percentage is the “correct” percentage to ensure retirement readiness. Even a 5% employee contribution won’t be enough to do this, she warns, but it’s a decent start, especially when adding in employer matching dollars.
“The data is very clear that if you auto-enroll someone at 2% or 3% of salary, they’re not very likely to change it, up or down,” Murphy says. “Putting people into the plan at a deferral percentage that is going to drive success, why wouldn’t you do that? We also have strong data showing you pretty much get the same opt-out rate, regardless of the enrollment percentage, whether it’s 3% or 10%.”
Fidelity is seeing a new trend that about one in three employers auto-enroll at a 5% salary deferral or higher, Murphy points out.
“That’s really encouraging from our perspective,” Murphy says. “Historically it’s been much closer to a 3% auto-enroll target on average for sponsors, but that’s changing for the better. Sponsors are also realizing that after you get someone in the door, into the plan, it’s critical to make an effort to keep them committed to the plan.”
This is where things like auto reenrollments and auto-escalation can be really powerful, she adds, and there are other strategies, such as targeted communications programs, that will help keep people focused and dedicated.
“We really believe sponsors are internalizing a lot of this stuff, and our latest snapshot just underlines the point,” Murphy notes. “The messaging is even penetrating down to the participant level. It’s a really great feeling when we can say one million people took a positive step on savings rates during the last quarter.”
She concludes by observing that employers “will always play a huge role” in preparing their work force for retirement, “but employees have to see the importance of saving as well.”
“When we look at the one million people who increased their savings rate during Q1 of this year, the most impressive group is the selection of people who use online guidance tools and in-person advice on a regular basis,” Murphy adds. “They pushed their contributions up by an impressive 4% during the quarter. These are great numbers to see—people are making these big jumps, they’re realizing retirement isn’t as far away as it might seem.”