Plan Sponsor Adoption of Auto Features Continues to Grow

Demonstrating the ongoing growth in the use of automatic features, a new survey finds that a solid majority of plan sponsors have implemented automatic enrollment in their defined contribution plans.

The Defined Contribution Institutional Investment Association’s (DCIIA) fourth biennial survey of plan sponsors’ use of and attitudes toward automatic plan features finds that more than 60% of all plans have implemented auto enrollment, the majority of which are larger plans.

More specifically, two-thirds of larger plans (over $200 million) have implemented auto enrollment, compared to 51% of smaller plans (under $200 million). One figure that sticks out in the data is the significant jump in adoption of auto enrollment for plans between $5 million and $50 million, rising from 38% of plans in 2014 to 58% in 2016.

When asked why they have not implemented auto enrollment, 53% of smaller plan sponsors responded that it was “unnecessary,” while the biggest issue for larger plans was “cost.” Other concerns included that “employees would object,” that it is “too paternalistic,” or that they have “unconducive employee demographics.”

With the data showing that the adoption of auto enrollment may have reached it “natural limit” for the largest plans, DCIIA suggests that future growth will likely come from smaller plans. To that end, the survey found that an increasing number of smaller plans are recognizing the value of auto enrollment, as 33% identified it as a top strategy for closing the savings gap, more than double the number (15%) from their survey two years ago.

Meanwhile, plan sponsors’ fears of participant complaints about the use of auto features have proven largely unwarranted, according to the authors. The findings show that the opt-out rates for both auto enrollment and auto escalation are most frequently found to be 1% or less, and no respondent indicated a percentage larger than 5%.

In a positive sign toward improving retirement security, the survey found that default savings rates for auto enrollment are increasing. In 2010, 55% of the plan sponsors surveyed had set 3% as the default contribution rate. By 2016, however, the percentage of plan sponsors reporting that they set the default rate at 3% fell to 32%, while the percentage setting the rate at 6% rose from 9% to 28% over the same period.

The use of auto escalation is also growing, albeit at a slightly slower pace. Consistent with the findings for auto enrollment, larger plans were found to be more likely to adopt auto escalation than smaller plans. Adoption among larger plans rose from 48% in 2014 to 59% in 2016, while the percentage increased from 20% adoption in 2014 to 32% in 2016 for smaller plans.

In addition, the survey found that the default annual contribution escalation rate remains steady at 1%, with 7 out of every 10 plan sponsors using that rate. When asked why, 43% of plan sponsors responded that they believe a 1% increase seems to be the “most palatable to participants.” Other common reasons included reasonableness from a fiduciary standpoint (28%), prevalence among peers (26%) and recommendation from a consultant (22%). Meanwhile, only 8% of plan sponsors that do not offer auto escalation say they intend to do so within the coming year.

The findings in DCIIA’s survey are based on the views of 194 DC plan sponsors conducted from late fall of 2016 through early 2017.

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