Perhaps the most interesting finding in the recently released 64th Annual Survey from the Plan Sponsor Council of America is that 3% is no longer the most common default deferral rate for automatically enrolled 401k plan participants.
In a nod to better plan design to help Americans save more for retirement, the new most common default deferral rate is now double the old standard: 6%, reports PSCA. “For the first time, the most common default deferral rate is now 6% of pay (32.9%) rather than the 3% of pay that has been the norm since 2006 (29% of plans),” PSCA said a statement announcing the report.
“For the first time, the most common default deferral rate is now 6% of pay (32.9%) rather than the 3% of pay that has been the norm since 2006 (29% of plans)”
PSCA 64th annual survey
While we recently reported findings from the survey on the SECURE Act’s impact on retirement plans, we thought this notable development deserved a little spotlight of its own, given our continuous focus on improving outcomes for 401k plan participants.
Plan designs are steadily moving beyond the automatic enrollment framework of the Pension Protection Act of 2006, the report states. The use of automatic enrollment and automatic escalation made modest gains again this year—62% of plans now use an automatic enrollment feature. More than a third (36.5%) of plans now have an auto-escalation cap greater than 10% of pay (a SECURE Act provision increased the QDIA cap from 10% to 15%).
“This, along with the fact that the most common default deferral rate is now 6% of pay, with 65% of plans now using a default rate more than 3%, will significantly boost overall savings rates over time,” the statement said.
Back in 2019, PSCA’s annual report for that year found that 31.6% of plans still used 3% as their default deferral rate (making it the most common), while 6% was used by fewer than 30% of plans. As recently as 2017, only 23.8% of plans used 6% as the default rate—9.1% fewer than this year’s report found.
PSCA’s 64th Annual Survey of 401k and Profit Sharing Plans reports on the 2020 plan-year experience of 518 plans. The full report is available for purchase at: https://www.psca.org/research/401k/64thAR.
Higher default rate has largest impact on savings rates
Plans with low default rates that match a high percentage of employee earnings induce higher-income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees, the paper’s abstract states. “When default savings rates are set higher, fewer employees move away from the default resulting in higher and more equal savings rates. Additionally, we find evidence that higher default savings rates increase usage of plan default investments.”
The plan design that results in the highest employee savings rates, highest acceptance of the default investment, and lowest disparities in savings rates by income is one that uses a high default rate and a lower employee match, the paper concludes.
While raising the default savings level should increase savings rates for new participants, the paper notes it won’t necessarily help existing participants. “Therefore, plan sponsors may also consider different kinds of reenrollment or plan-reset options to utilize the positive impact of default savings rate increase. Additionally, plan sponsors should also consider including provisions for automatic savings rate increases to further boost participant savings levels.”
The research paper can be downloaded here.
SEE ALSO:
• SECURE Act’s Impact on Retirement Plans (So Far)
• New Data Further Showcases Power of Auto Enrollment