Defined contribution plan sponsors have made a lot of progress in the past two years in helping plan participants prepare for retirement. According to the Defined Contribution Institutional Investment Association's 2012 Plan Sponsor Survey, plan sponsors know what they need to do but are hesitant to do it.
When asked about their top objectives, nearly half of plan sponsors put "increasing participants' savings rates" first or second on their priority list. Other major goals are improving communication and education efforts, improving investment outcomes, facilitating optimal retirement income replacement and increasing participation rates.
The survey finding highlighted the increasing use of automatic enrollment. Fifty-six percent of plan sponsors surveyed said they use auto enroll, up from 44 percent in 2010, and the trend is gaining momentum. One-third of plan sponsors that don't currently use automatic enrollment expect to add it within the next 12 months, almost double the percentage in 2010. Enrolling participants automatically makes a major difference in participation. Plans that added auto enroll increased their participation rates by 12 percentage points to 81 percent.
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The research showed that most plan sponsors believe that participants should set aside at least 10 percent of their income, but when they implement automatic enrollment, they generally set the default contribution rates very low, with more than half reporting default contribution rates of 3 percent or less.
Many studies have shown that auto-enrolled participants tend to stay at their default contribution rates. Many companies have increased their default contribution rates, but 54 percent continue to start auto-enrolled participants at between 1 and 3 percent.
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