Short of reviving the heyday of defined benefit pension plans, automatic enrollment in defined contribution plans has been considered the best hope for addressing America's retirement crisis. By default, sponsors automatically deduct a specified amount from employees' paychecks and allow them to opt out they wish. But how high should that deduction be? At what threshold do employees exercise their option to quit the plan?
Probably higher than the 3 percent default level set by the Pension Protection Act of 2006, according to a recent bulletin from the Employee Benefit Research Institute.
Though 42 percent of people surveyed say they would continue contributing at that level, 44 percent say they'd be happy to contribute at twice that rate. Eleven percent don't feel that a 6 percent deferral is high enough and would increase it.
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Twenty-four percent of those surveyed would continue contributing but only if they could defer less than 6 percent, while 16 percent would opt out at that level.
Since many advisors believe that even a rate as high as 10 percent isn't enough to achieve retirement goals, how would employees react if faced with such a deferral rate?
"The Retirement Confidence Survey only asks about 3 percent and 6 percent, so a result for 10 percent isn't available," said Craig Copeland, an EBRI senior research associate.
"Obviously, more is better for retirement security, but defaulting to a number above 6 percent (the voluntary average) is likely unrealistic.
"However, an alternative to defaulting to 10 percent is to default to 6 percent to get them into the plan, and accompany the default with an auto-escalation feature that would automatically increase the contribution rate annually or at an increase in wages and/or salary. It might take them a few extra years to get to 10 percent, but it's also more likely to get them started, as more time works to individuals' advantage in preparing for retirement security."
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