The adoption of auto enrollment in defined contribution (DC) plans grew to 69% in 2019, up from 60% in 2016, according to a new survey of 175 plan sponsors.
But the same report says long-growing auto enrollment may be hitting its plateau, as future adoption looks like it could slow down. Only 7% of plans currently not offering auto enrollment say they are “very likely” to do so in the next 12 months, while another 14% report that they’re “somewhat likely” to add this feature.
These are among the key findings in a new research from the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center (RRC), which released the fifth edition of its plan sponsor survey, examining automatic features in DC plans.
Almost three in four (73%) plans with over $200 million in assets have now adopted automatic enrollment (up from 67% in 2016); and 63% of plans with less than $200 million in assets have now adopted it (up from 51% in 2016).
The most common default (74%) is for all new hires to be enrolled. Periodic sweeps are only used by about 20% of plan sponsors, indicating it is a tactical remedy vs. a strategic tool.
For the holdouts, there are several perceived barriers to offering auto enrollment. The most frequently cited barriers are a possible increase in recordkeeping expenses; it appearing too paternalistic; it being deemed unnecessary, as participation is already high; costs being too great (due to the match required); and, lastly, concern over possible employee complaints.
The majority of plans offering auto features see a direct and attributable benefit to their plans’ outcomes as a result, a statement announcing the release of the research says. The most commonly cited benefit is having higher participation, followed by faster growth of assets in the plan, which can lead to reduced costs.
In their survey responses, plan sponsors indicate that increasing savings rates and improving communications top their list of objectives for their plans. Implementing auto features is directly helping plan sponsors get the results they desire.
In short, plan sponsors are adopting auto-feature practices because they recognize that they are working.
“We are pleased to conduct and share research that can help to inform industry discussions around defined contribution retirement plan design and administration,” said Warren Cormier, executive director of the DCIIA RRC. “Even as we collectively remain focused on near-term issues related to the global pandemic, we must remember to take a long-term view and encourage plan participants to do so as well. We hope that this research supports plan sponsors’ longer-term discussions around the goal of improving retirement outcomes for America’s workers.”
The full report is freely available in DCIIA’s online Resource Library.
Auto escalation trends
Plans’ adoption of auto escalation has also continued to grow rapidly and is approaching auto enrollment adoption levels. Presently, 69% of plans offer auto escalation, up from 50% from the organization’s prior survey. Larger plans (76% of them) are substantially more likely to offer auto escalation than smaller plans (55% of these do).
Six in 10 plan sponsors offer auto escalation as a default option in conjunction with auto enrollment. The remaining third report that it is not a default option for their plans and must be elected by participants.
More than eight in 10 plan sponsors have set a default deferral rate increase of 1%. This choice was reported to be driven by concerns related to:
- what participants will find palatable
- a perceived reasonableness from a fiduciary standpoint
- consultant recommendations
- it being the most common practice among plans
The report notes auto escalation may also be reaching its maximum adoption level. Only 7% of plans that don’t offer it today say they are “very likely” to offer it in the next 12 months; only 5% are “somewhat likely.”
The two most often-cited reasons for not offering auto escalation are a concern that it’s “too paternalistic” and “not having considered/studied it carefully enough.” Fear of participant backlash is also mentioned by plan sponsors, but this is not a leading barrier.
QDIA reenrollment
Adoption of qualified default investment alternative (QDIA) re-enrollment remains limited. While this year’s survey reports a modest increase, with 24% reporting having ever done a QDIA re-enrollment, up from 18% in the prior survey, periodic sweeps are only used by about 20% of plan sponsors, indicating it is viewed as a tactical remedy rather than as a strategic tool.
Plan sponsors cite a few reasons for not conducting a QDIA re-enrollment. The most common are:
- satisfaction with participants’ current asset allocation
- they are considering it in the future
- a perceived lack of benefits, combined with a perceived risk
Conclusions
The report finds a majority of plans (two-thirds) offering auto features see a direct and attributable benefit to their plans’ outcomes as a result.
The most commonly cited benefit is having higher participation, followed by faster growth of assets in the plan, which can lead to reduced costs.
“Clearly, the use of auto features has had an impact on plans and plan participants’ behavior. Plan sponsors’ recognition of this has been the primary stimulus for the sustained practice and continued growth in adoption of these features,” the report says.
It concludes by recommending industry organizations and service providers work together with plan sponsors to continue to address perceived barriers to offering auto features, including:
- Concerns about an increase in recordkeeping expenses
- Concerns that costs would increase due to company match required
- Perceptions that auto features are too paternalistic
- Lack of considering/studying auto features carefully
- Lack of perceived need as participation is already high
- Concerns over possible employee complaints
The pattern of plan sponsor actions on auto features offers clear evidence of the role that a well-designed safe harbor and related sub-regulatory guidance can play in supporting constructive changes, the report concludes. “These safe harbors have proven to provide the type of protection necessary to encourage plan sponsors to shoulder the burden of implementing change.”
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.