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How Auto-Enrollment Can Affect Engagement and Savings Rates

DC Plan Design

While automatic enrollment is a foundational plan design feature that helps boost plan participation, a new study finds that engagement and savings rates can vary dramatically depending on how participants are enrolled. 

In fact, plan participants who are auto-enrolled in workplace savings programs tend to remain unengaged with such savings plans after enrollment. In contrast, participants in plans without auto-enrollment tend to have higher engagement and savings rates than those in plans with automatic features. 

That’s according to Empower Retirement’s inaugural study, Empowering America’s Financial Journey, which examines the savings patterns of more than 4 million Americans saving for retirement in corporate workplace savings plans.

Moreover, despite participants who are in plans without auto-enrollment having higher engagement and savings rates, more participants in plans with auto-enrollment tend to think they are saving enough than those without auto-enrollment (71% versus 58%). 

“Part of the problem could be that participants may view saving at a default savings rate or meeting the employer match as an indication they are doing enough,” the study observes. In fact, more than 6 in 10 workers say their savings rate is either based on the employer match or automatically set by the plan. 

As such, because automatic features are not designed to drive active participant engagement, they should also be offered with personalized and relevant communications and campaigns focused on boosting participant plan involvement, the study suggests.

Benefits of Engagement 

Noting that retirement and financial planning engagement can lead to many positive outcomes, Empower found that over the past 12 months, two-thirds of participants (67%) engaged with their retirement accounts and finances. Based on that research, the study revealed that compared with unengaged participants, engaged participants: 

  • save around 61% more (9.2% versus 5.7%);  
  • are more confident about saving enough in their 401(k) plans (63% versus 28%); and  
  • rate themselves higher when it comes to financial knowledge (44% versus 15%). 

What’s more, participants with more frequent web interactions also have higher savings rates. Here, the study found that savings rates for participants with 6 to 10 web interactions are more than 50% greater than those with no web interactions (9.7% versus 6%).

Empower further suggests that with less than half of Americans (48%) feeling comfortable making investment decisions, personalized guidance and advice can help. According to the study, Americans are more comfortable making an investment decision when they: 

  • work with an advisor (61% versus 39%);
  • use online advice (62% versus 39%); and
  • receive advice over the phone (69% versus 40%). 

Seeking Advice 

While Americans seek professional advice for different reasons, seeking advice initially is less event driven than savings driven, the study further observes. For instance, an increase in income or savings (39%) and accumulating a certain amount of savings (38%) are the most common reasons for individuals to first seek professional advice, as compared to a major life milestone (26%), such as purchasing a home or having a child. 

What’s more, as participants get older, participant usage of target date funds (TDFs) declines as do-it-yourself (DIY) approaches increase. According to the study, the proportion of participants using TDFs flattens out around age 54, when a DIY approach surpasses TDF usage slightly. Coinciding with this shift, advice usage increases and is likely tied to participants being closer to retirement and focusing on the challenges associated with retirement.

Here again, the study emphasizes that participants who are engaged, leverage educational content and seek out advice have higher savings rates than unengaged participants. “Each of these interactions and services builds on the other, and participants taking advantage of a combination of these resources have incrementally higher savings rates,” the firm stresses. 

Pandemic’​s Silver Lining

Empower’s study observes that the pandemic has proven to be a catalyzing event when it comes to how Americans manage their money. Despite economic uncertainty, workers placed more money into their 401(k) plans in 2021 than in the previous year. 

Workers are saving more: Compared with pre-pandemic levels (fourth quarter of 2019), average worker savings rates are higher (8.2% versus 7.8%), and the percentage of eligible participants contributing to their 401(k) plans has also risen (85% versus 84%).

Gen Z is ahead: Gen Zers account for the highest proportion of savers contributing to their workplace retirement plans, with their overall percentage even higher than those of working Baby Boomers. Many Gen Zers also indicated that they have already started planning for retirement (beyond just contributing to a retirement plan).

Women become better savers as income rises: While women feel less confident than men that they are saving enough in their 401(k) plans (49% versus 64%) and are saving slightly less on average than men (7.9% vs 8.5%), the study notes that there appears to be positive movement in closing that gap. Women are saving at higher average rates than men at income levels above $60,000.

Savings strategies are shifting: When available, nearly one in five 401(k) participants are diversifying their taxable retirement savings by making Roth contributions, and Roth contributors are saving at a higher rate than those not contributing to Roth accounts (10.2% vs 7.9%).

Empower’s study is based on an analysis of approximately 4 million active corporate DC plan participants on the firm’s recordkeeping platform, as well as a survey of more than 2,500 Americans conducted from Sept. 21 to Oct. 11, 2021.

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