New Research from DCIIA Finds that Plan Sponsors Can Make Auto Features Work Harder in Their DC Plans

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A new study released today finds that there is a real opportunity for defined contribution (DC) plan sponsors to positively influence the retirement security of their participants by making their auto features more efficient.

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A new study released today finds that there is a real opportunity for defined contribution (DC) plan sponsors to positively influence the retirement security of their participants by making their auto features more efficient.

These findings are part of new research released by the Defined Contribution Institutional Investment Association (DCIIA). The study examines whether and how plan sponsors are actually implementing these automatic features within their plans. The full report, "Plan Sponsor Survey: Structuring DC Plan Automatic Features to Pump Up Retirement Savings”, is available online at http://www.dciia.org.

In an online survey conducted among 101 large plan sponsors during the third quarter of 2010, DCIIA found that plans implementing automatic enrollment were able to increase plan participation rates by nearly 30 percent above pre-auto enrollment rates, and that the majority of their plan participants viewed automatic enrollment as a distinct benefit. The study also uncovered a real opportunity for greater progress in this area as a disconnect remains between what plan sponsors believe are optimal participant savings rates (10% or more) and the current automatic enrolment default contribution rates, which commonly start at 3% and escalate (when offered) to only 6%.

The results suggest that by altering their automatic default contribution rates and automatic contribution escalation policies, plan sponsors can measurably help their auto-enrolled participants to meet their retirement income needs.

“The fact that many plans’ automatic features are not designed to drive contribution rates high enough to secure the retirement future of their participants suggests that this may be the next big item on the plan sponsor agenda,” said Catherine Peterson, DCIIA Research Committee member and Director of Retirement Insights at J.P. Morgan Asset Management.

Ms. Peterson continued, “Plan sponsors have done well bolstering participant rates, but now we also need to focus on contribution rates. Automatic escalation features have lagged significantly behind the adoption and implementation of automatic enrollment features, so we see a real opportunity for improvement in this area. DCIIA findings support defaulting employees into the plan at the plan’s match rate and then escalating contribution rates annually 2% per year to reach a 10% or higher savings level as rapidly as possible.”

Among the key findings in this year’s survey:

  •     Plan sponsors believe participants should earmark at least 10% or more of their earnings for retirement savings.
  •     Of the plan sponsors that have adopted automatic enrollment, more than half have opted for a default contribution savings rate of 3%.
  •     Only about one-third of plan sponsors offering automatic enrollment combine it with automatic contribution escalation, with the vast majority (89%) increasing contribution rate at 1% per year.
  •     The large majority of plan sponsors (70%) that have adopted automatic enrollment believe participants hold favorable views of the feature.
  •     Respondents reported plan participation rose by nearly 30 percent above “pre-automatic enrollment” rates.

About DCIIA

The Defined Contribution Institutional Investment Association (DCIIA) is a non-profit association dedicated to enhancing the retirement security of American workers. To do this, DCIIA fosters a dialogue among the leaders of the defined contribution community who are passionate about improving defined contribution plan design. DCIIA members include investment managers, consultants, law firms, record keepers, insurance companies, plan sponsors and others committed to the best interests of plan participants.

DCIIA’s mission is underpinned by five core beliefs:

  •     The primary role of defined contribution retirement plans is to create retirement income adequacy: Helping plan participants build sufficient savings to achieve their goals while working (accumulation) to support their income needs in retirement (distribution).
  •     Well-designed default programs can improve retirement outcomes: Automatic enrollment and automatic contribution escalation (of participant contribution levels), when combined with default investment options that take advantage of institutional asset management techniques, help increase savings levels and promote better retirement outcomes.
  •     The regulatory framework and industry infrastructure must offer full support for all types of institutional investment approaches and products, giving defined contribution plans access to the complete toolkit of investment, retirement income and advice solutions.
  •     Plan sponsors and their consultants should have the ability to select the best combination of partners to meet plan needs, including investment and retirement solutions, record keeper, custodian, managed account, advice and other service providers.
  •     Full transparency on pricing and revenue sharing is critical for plan sponsors to evaluate the optimal combination of solutions to deliver improved retirement outcomes for their participants.

To further its mission, DCIIA:

  •     Aims to make it simpler for defined contribution plan sponsors to implement appropriate institutional investment management approaches in DC plans focused on delivering higher returns and reduced risks;
  •     Provides an independent forum for thought leadership on advancing defined contribution and retirement income design, including institutional default investment strategies and retirement income solutions;
  •     Conducts research, publishes analysis and insights and hosts events that support the advancement of institutional approaches and better defined contribution design;
  •     Identifies and removes barriers for plan sponsors so that they may pursue improved defined contribution institutional investment structures;
  •     Encourages improved fiduciary practices and tools to support institutional defined contribution plan design; and
  •     Educates legislators and regulators about issues and challenges in institutional defined contribution plan design and better approaches to retirement security

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Lew Minsky
Defined Contribution Institutional Investment Association
202-367-1124
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