New analysis from The Principal shows automatic enrollment features in 401(k) plan designs can drive better savings behavior without dramatically affecting participation.
However, Barrie Christman, vice president of individual investor services at The Principal points out most plan sponsors tend to set their default rate at an insufficient level.
Employers offering automatic enrollment in 401(k) plans must choose a default investment fund and savings rate, requiring employees to actively opt-out if they choose not to participate. Participating employees accept the default fund at the default rate, or select different funds and rates.
Client data from The Principal shows that plans with an automatic enrollment feature defaulting at 3 percent1 produce an average deferral of 6.3 percent. This is lower than the average deferral of 6.8 percent for plans without an automatic enrollment feature2. In contrast, the average deferral is 7.1 percent for plans that have a 6 percent default automatic enrollment feature3.
Most participants automatically enrolled in their plan sponsor’s retirement plans either accepted the default rate or chose to defer even higher, even as the default rate increased from 3 percent to 6 percent. In fact, at a 3 percent default rate, twice as many participants chose to defer more (36 percent) rather than opt out completely (15 percent) or at a rate lower than the default (3 percent).
The following tables compare participant deferral rates at a 3 percent default and a 6 percent default:
| 3% Default Rate | ||||||
| Deferral Rate | % of Total Participants | Avg. Deferral % | ||||
| Opted out at 0% | 15% | 0.0% | ||||
| Deferring at >0% to <3% | 3% | 1.5% | ||||
| Deferring at default of 3% | 45% | 3.0% | ||||
| Deferring at >3% | 36% | 6.7% | ||||
| 6% Default Rate | |||||||||||||
| Deferral Rate | % of Total Participants | Avg. Deferral % | |||||||||||
| Opted out at 0% | 19% | 0.0% | |||||||||||
| Deferring at >0% to <6% | 14% | 2.9% | |||||||||||
| Deferring at default of 6% | 49% | 6.0% | |||||||||||
| Deferring at >6% | 18% | 11.8% | |||||||||||
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