Adoption of automatic enrollment features in state and local government defined contribution (DC) retirement plans has expanded substantially during the past 15 years, finds a new report from MissionSquare Research Institute.
Seventeen states and Washington D.C. now require or permit some form of auto-enrollment, the report found. But few state and local governments have adopted automatic escalation, as government officials may be hesitant to move forward without explicit statutory authority.
In the private sector, however, the report notes automatic enrollment is becoming a standard practice, with two-thirds of DC retirement plans incorporating automatic escalation.
The findings are outlined in the new report, “Automatic Enrollment and Automatic Escalation in State and Local Government Defined Contribution Plans,” prepared by Paula Sanford, Ph.D., Senior Public Service Associate at the University of Georgia, and released during National Retirement Security Month. The report offers automatic enrollment and escalation case studies for public sector retirement plans in California, Georgia, Kentucky, Missouri, Oregon, and Virginia.
“Incorporating automatic enrollment and escalation features into public sector DC retirement plans now is imperative”
MissionSquare Retirement’s Deanna J. Santana
“Relying solely on their pension for financial security during retirement is no longer a viable option. Incorporating automatic enrollment and escalation features into public sector DC retirement plans now is imperative,” said Deanna J. Santana, the Acting CEO and President of MissionSquare Retirement. “Supplementing their pensions with DC plan savings helps public service employees attain financial security after a career dedicated to serving our communities.”
Santana highlighted that jurisdictions already implementing automatic enrollment and escalation features are witnessing considerable success in augmenting employees’ retirement savings. “This success is particularly critical given the upward trend in retirement costs and life expectancy.”
The report notes that participation in both automatic enrollment and escalation features remains voluntary, in that the employee retains the right to leave the plan or change contributions.
The state and local jurisdiction case studies in the report offer five lessons learned:
- Automatic features improve retirement savings. Automatic enrollment and automatic escalation increase the number of employees who contribute to their defined contribution plans and, therefore, their retirement savings. Many public plans have used these features for over a decade without significant implementation challenges or negative employee feedback. And as more private employers offer auto features, implementation in the public sector helps employers stay competitive in workforce recruitment and retention.
- Understanding the financial, economic, cultural, and political environment is critical to creating a savings feature that will stand the test of time. Governments and plan administrators should consider wages, unemployment, turnover, tenure, the agency’s finances, political viewpoints, and expected retirement income sources to design savings features.
- Data tracking provides important information about the impact of savings features. Data helps determine if changes should be made to default rates or the impact of any reforms. Also, plan participation and contribution rates data helps design education tools that will resonate with employees.
- Combining government matches with automatic features appears to keep employees in the plans and at higher contribution rates. Matches incentivize employee savings and help automatically enrolled employees sustain contributions amounts.
- Education is a critical component for keeping employees in a deferred compensation plan and increasing contribution rates. Successful deferred compensation systems and administrators have invested resources in developing savings and retirement information that explains why and how much employees need to save, which reduces employee resistance to automatic features and deters them form opting out.
SEE ALSO:
• Automatic Enrollment Adoption Grew to 85% in 2022: T. Rowe Price
• Hawaii Approves State-Run IRA, but Minus Auto-Enrollment
• IRI Wants Virtually All Employees Auto Enrolled into Retirement Plans
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.
