At a Washington, DC roundtable discussion sponsored by the Defined Contribution Institutional Investment Association (DCIIA), Harvard professor Brigitte Madrian presented research findings illustrating the dangers of low deferral rates when using auto-enrollment. Many plan sponsors view the 3% deferral rate used for safe harbor purposes as a recommended baseline. Writing about the roundtable, however, Callan’s Lori Lucas notes that there are actually very few safe harbor plans. If a safe harbor is not in play, why use the safe harbor baseline?
When a higher deferral rate is used in combination with auto-escalation, there is a 67% increase in wealth accumulation over a 10-year period, Madrian’s research found. For plans that start at 6% deferral rather than 3%, the wealth accumulation over 10 years increases by 15%; increasing auto-escalation caps from 6% to 10% results in 29% more wealth; and combining the two results in a 67% increase. Madrian said that cost should not be an inhibitor since plans can use a stretch match — for example, matching 30% of the first 10% rather than 50% of the first 6%.
