Participants in automatic enrollment plans tend to save below the level of the employer match, clustering around the relatively low default rates. But does this trend hold over time?
New research from Vanguard notes that at a given point in time, one-third of participants in Vanguard plans contribute below their plan-specific employer match level, although this declines to 18% of participants after accounting for plans with an automatic increase design feature (and assuming no opt-out behavior by participants).
Moreover, in automatic enrollment (AE) plans, more than half (55%) are contributing below the match initially, and one in five (21%) is still below that level after three years.
In voluntary enrollment (VE) plans, participant decisions on contributions are often anchored either on the match structure or they choose to not participate at all. While the participation rate in VE programs is lower than in AE plans, a higher proportion in the VE plans choose deferral rates at or above the match level.
Possible Solutions
One simple strategy to boost match-maximizing behavior would be to raise initial default deferral rates in AE plans. Plan sponsors might well be concerned about the additional costs of that match, and Vanguard estimates that costs would in fact rise — by about one-fifth on average. That’s lower than you might expect, but it’s due to the fact that higher-paid employees are more likely to enroll at a deferral level where the match is maximized (or higher), and when they are subject to an AE design they are more likely to override the default and select a higher deferral rate.
However, Vanguard estimates that half of this cost could be mitigated through use of a three-year cliff vesting schedule, in view of employee turnover trends.
Of course, another approach would be to specifically target messages to those individuals who are contributing below the match.
Other Automatic Enrollment Findings
While some analysts have suggested that employer matches in AE plan designs are less generous than those in VE designs, the overall generosity of matches among the VE and AE plans in the Vanguard sample was “strikingly similar.”
VE participants had a median tenure of 11.7 years — five times longer than the 2.3 year median tenure of AE participants, a differential Vanguard attributed to the fact that many plans apply AE only to new hires. Moreover, VE participants had a median age of 48.0 years — about a decade older than the median age of 37.3 years among AE participants. VE participants also had a higher median income than AE participants.
In the Vanguard sample, just over half (57%) of the participants in VE plan designs have access to an automatic increase feature, and nearly a quarter (23%) of those offered annual increases signed up for the feature. As a result, 13% of VE participants were actually enrolled in annual increases. On the other hand, within AE plan designs, more than 9 out of 10 participants are in designs with an automatic increase feature.
