New DCIIA White Paper Helps DC Plan Sponsors Understand How to Implement Auto Features to Achieve Best Outcomes

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When it comes to designing automatic features for defined contribution (DC) plans, employers should understand the importance of robust defaults for helping employees save for a secure retirement. A newly released Defined Contribution Institutional Investment Association (DCIIA) white paper entitled “Best Practices When Implementing Auto Features in DC Plans” explores how automatic features, such as auto enrollment and auto escalation, can be structured to help DC plan participants amass enough savings to reach an effective replacement ratio in retirement.

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...plan sponsors are increasingly possessing a clearer understanding that auto feature designs can play an important role in helping employees achieve a secure retirement.

According to a 2012 survey by the Defined Contribution Institutional Investment Association (DCIIA), the majority of DC plans (56 percent) offer automatic enrollment. Nearly half of the plans surveyed also offer automatic contribution escalation (46 percent). Academic research has long supported the view that, because of employee inertia when it comes to DC plans, automatic enrollment can increase participation among difficult-to-reach employees.

At the same time, research shows that inertia can cut two ways: While it is good news that employees remain in the plan once auto enrolled, on the other hand, inertia can also cause them to remain at the automatic enrollment defaults, regardless of how closely those default levels match what the employee would have selected if he or she had proactively elected to enroll in the plan. According to the same 2012 DCIIA survey, plan implementation of automatic features tends to be conservative.

Lew Minsky, DCIIA’s Executive Director, stated that “plan sponsors are increasingly possessing a clearer understanding that auto feature designs can play an important role in helping employees achieve a secure retirement.” Examples of best practices when implementing auto features include: auto enrolling all current and future employees into the plan; setting the initial deferral percentage at no less than 6 percent; and employing an auto escalation increase of 1 percent or 2 percent, to a maximum of no less than 15 percent.

The white paper includes case studies that explain how three corporate defined contribution plan sponsors are implementing auto features in more robust ways, improving their DC offerings for participants.

This paper is part of a series of research projects focused on improving outcomes in defined contribution plans that the Defined Contribution Institutional Investment Association (DCIIA) is developing. The paper is co-authored by Lori Lucas, Callan Associates, Marla Kreindler, Morgan, Lewis & Bokius LLP, Nancy Helt, Fidelity Investments, David Levine, Groom Law Group, Steve Saxon, Groom Law Group, Robert Holcomb, J.P. Morgan, Lisa Barton, Morgan, Lewis & Bokius LLP, Ross Bremen, NEPC, Todd Castleton, Proskauer Rose LLP, Nate Miles, State Street Global Advisors, and Joe Masterson, Transamerica. The full report is available online at http://www.dciia.org or through the following link: http://www.dciia.org/info/publications/Pages/default.aspx.

About DCIIA
The Defined Contribution Institutional Investment Association (DCIIA) is a nonprofit association dedicated to enhancing the retirement security of American workers. Toward this end, 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. For more information go to: http://www.dciia.org.

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