Without a doubt, the defined contribution “auto-revolution” (auto-enrollment, auto-deferral, auto-escalation) has had a major impact on the savings behavior and potential participant outcomes for many retirement savers.
And now Janus Henderson is out with a new report that details the impact of these plan design elements while offering “five forward-thinking suggestions for how plan sponsors can build upon their plan’s existing automatic features and further enhance participant retirement readiness.”
Consider that:
- About seven in 10 plans use auto-enrollment, but most of these fund only pre-tax accounts.
- Although the use of auto-escalation is increasing, the majority of companies set their annual increase at only 1 percent.
- While most plans use target-date funds as their default, studies have found that users of managed accounts are more engaged and save more for retirement.
- As student debt in America reaches $1.5 trillion in 2018, one employer is finding ways to incentivize employees to pay off debt while still saving for retirement
Written by Matt Sommer, vice president and director in the Retirement Strategy Group, and Phil Collins, an account manager in the Retirement Strategy Group, the report is just as it’s titled, Plan Design: Defined Contribution Redefined.
“Since the enactment of the Pension Protection Act of 2006 (PPA), automatic features have become common within Defined Contribution plans such as 401(k)s, 403(b)s and 457s,” the authors note. “Specifically, auto-enrollment, auto-escalation and qualified default investment alternatives (QDIAs) have helped increase DC assets from $3 trillion in 2007 to $5.3 trillion in 2017.”
The legislation introduced several new plan design features to help employees save for their futures, and over the last several years, “plan sponsors that have adopted these features have been praised, and rightfully so, for breaking through the inertia that previously kept many employees on the sidelines.”
But they argue that it might be time to consider new elements to further enhance participant retirement preparedness, including:
- Combine auto-enrollment with pre-tax and Roth accounts
- Tie auto-escalation to retirement income replacement
- Use multiple qualified default investment alternatives
- Incorporate an after-tax savings option in the plan design
- Reward student debt reduction with a company match
“It has been over 10 years since auto-enrollment, auto-escalation and qualified default investment alternatives arrived on the scene,” they conclude. “While they have been positively received by most plan sponsors, we suggest that the time may have arrived to revisit these features and explore others to determine if a more appropriate course of action is necessary.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
