Workers like auto-enroll, so why don’t plans push it?

“Anemic” default-contribution rates among defined-contribution plans using automatic enrollment stand in stark contrast to what plan executives consider optimal savings rates, a survey of 101 plans by the Defined Contribution Institutional Investment Association has found

“Anemic” default-contribution rates among defined-contribution plans using automatic enrollment stand in stark contrast to what plan executives consider optimal savings rates, a survey of 101 plans by the Defined Contribution Institutional Investment Association has found.

Although auto-enrollment “has significantly boosted participation and employees view it as a distinct benefit, many plans’ automatic features are not designed to drive contribution rates high enough to secure participants’ retirements,” according to the association’s report on the survey.

The results show a big difference between what executives say and what they do.

For example, the survey found for 87% of respondents, the optimal savings rate for participants is 10% or more before any company match. Yet among the 44 plans in the survey using auto enrollment, 55% set a 3% default rate; another 7% of respondents go even lower.

“Clearly, there is a disconnect between what sponsors say is the optimal savings rate and what their default rate is,” said the report’s lead author, Catherine Peterson, a vice president and director of retirement insights for J.P. Morgan Asset Management and a member of the association’s research committee.

Equally troubling were responses by the 57 plans that don’t use auto enrollment. Sixty-five percent said that it is “very unlikely” that they will offer this option in the next 12 months, while 19% said that it is “somewhat unlikely” that they will offer auto-enrollment, according to the report, issued March 14.

The primary reason that plan executives gave for not offering auto-enrollment was an already high participation rate by employees, Ms. Peterson said. However, the survey didn’t ask — and respondents didn’t provide information — about what is considered a high participation rate.

Another top reason for not offering auto-enrollment was the belief by plan executives that it is “too paternalistic” and that employees would be upset by it, Ms. Peterson said. Other reasons for not offering auto-enrollment included beliefs that it would be “inappropriate in the current economic environment” or too expensive.

In addition to low default rates, the survey found that many plans that use auto enrollment don’t include all their employees.

Although “most plans don’t conduct ongoing periodic automatic enrollments for existing employees,” the survey found 39% of the plans with auto enrollment have performed only a one-time sweep of existing non-participants into their plans.

“With an emphasis on automatic enrollment for new hires only, it may take certain companies years before the full impact of automatic enrollment plays out,” the report said.

Employers with defined-benefit plans and those without corporate matches for their DC plans are less likely to enroll participants automatically, according to the report.

Most executives with auto-enrollment plans said their employees responded positively, with 70% of the managers saying their workers’ attitudes toward auto enrollment are “favorable” or “somewhat favorable” and 30% saying their employees are indifferent, Ms. Peterson noted.

The survey also found that “conservative default investment funds such as money market or stable value are far from the norm.”

TARGET FUNDS WIDELY USED

Seventy percent of respondents said target date funds are their default investment option. The next most popular option, at 14%, was balanced funds.

“Automatically enrolled participants will likely remain stuck at inadequate savings levels for years due to low default deferral levels,” the report said. “However, due to the common use of target date funds as defaults, employee savings will be well-diversified and strategically re-balanced.”

The association conducted the online survey of plan executives during the fourth quarter, choosing plans at random, Ms. Peterson said.

Forty-one percent of the plans in the survey have assets of $1 billion or more, 35% have assets between $100 million and $1 billion, and the rest have assets of less than $100 million.

Among respondents, 72% represent 401(k) plans, 14% are from 457(b) plans and the rest are from 403(b) and 401(a) plans.

In addition to Ms. Peterson, other authors of the report were Pam Hess, director of retirement research at Aon Hewitt, and Lori Lucas, executive vice president and DC practice leader at Callan Associates Inc.

Robert Steyer is a reporter at sister publication Pensions & Investments.