Public sector employees exhibit high acceptance rates of default investments in defined contribution (DC) plans, with over 80% of participants accepting the default option across all ages.
“Public sector employees benefit from these default options, which help them make better retirement saving decisions.”
Zhikun Liu, MissionSquare Research Institute
That’s according to a new study from MissionSquare Research Institute titled, “Default Investment Acceptance Among Public Defined Contribution Plan Participants.” The study explores how demographic factors (such as age, income, and gender) and economic factors (such as market volatility) influence the acceptance of default investments among public sector employees.
This research, co-authored by Zhikun Liu, PhD, CFP, Vice President, Head of MissionSquare Research Institute at MissionSquare Retirement, and David Blanchett, PhD, CFP, CFA, Managing Director and Head of Retirement Research at PGIM DC Solutions, highlights the importance of default investment options, such as target-date funds, in helping employees save for retirement. The study also compares the default investment acceptance rates of public sector employees with those of private sector 401(k) participants.
“This research underscores the importance of well-designed default investment options in public sector DC plans,” Liu said. “Our findings suggest that public sector employees benefit from these default options, which help them make better retirement saving decisions.”
There do appear to be important differences in default investment acceptance depending on whether it is a stable-value or a target-date fund, the report found. Overall, acceptance of the TDF is generally higher than stable value, except for the older ages. While default acceptance for the TDF declines roughly linearly by age, acceptance for stable value is highest at the youngest and oldest ages.
The study found default investment acceptance declines with age and income levels, but is higher among female participants. Overall, 88.7% of men accepted a target-date fund as the default investment versus 90.9% of women.
Some other key findings:
- Market Volatility Impact: The study found that market conditions, such as the volatility experienced in 2020, can significantly affect default investment decisions, particularly among older participants.
- Comparison with Private Sector: Public sector employees are more likely to accept default investments compared to their private sector counterparts, even when controlling for age and income.
- Impact of Income on Default Investment Acceptance: Default investment acceptance rates decrease with both age and income, with younger, lower-income participants having the highest acceptance rates.
- Opt-Out Rates: Public employees who initially accept the default investment have a low opt-out rate, approximately 1% per year, but this rate increases with age and income.
The study uses panel data from approximately 340,000 newly enrolled participants in public DC plans across four years (2020–2023), with a focus on those using target-date funds as the default investment. The analysis also included a limited number of plans using stable-value funds as default investments.
The findings highlight the need for plan advisors and plan sponsors to design effective default investment options and strategies to encourage better retirement planning. Employers should consider implementing programs to revisit default investment decisions, especially during periods of market volatility.
Access the full report here.
SEE ALSO:
• Public Sector Employees Worried Over Retirement Readiness
• Plan Sponsors Count on Personalization for Improved Retirement Outcomes
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.