Automatic enrollment in employer-sponsored retirement plans increases participation but may also hold down contribution rates, according to a study released by Vanguard on Tuesday.
Nearly three-quarters of defined contribution plans set the default contribution rate at 4 percent of pay or less, which is far too low, says Vanguard. Instead, Vanguard recommends a contribution rate of 12 percent to 15 percent of an employee’s salary, including the employer match.
The low default rate is one of the issues that needs to be addressed in many plans, says Vanguard.
“Plan sponsors and the industry as a whole must bear the responsibility to continue the significant progress impelled by the Pension Protect Act, including driving improved savings rates for all participants," says Martha King, managing director of Vanguard’s Institutional Investor Group. “Moreover, the 401(k) system needs to cast a wider net to afford the opportunity for more Americans to prepare financially for retirement and capitalize on the advantages of these plans.”
Vanguard, which has $800 billion in assets under management in defined contribution plans, issued the report on the 10th anniversary of the passage of the Pension Protection Act, which codified the ability of plans to have automatic enrollment, automatic increases in contributions and other features. The report is based on data from 1,900 plans with 3.9 million participants.
As of the end of 2015, 41 percent of Vanguard defined contribution plans had automatic enrollment, up from just 10 percent a decade ago. Of those plans, 70 percent also have automatic annual increases in contributions. Last year, 63 percent of new Vanguard participants were hired under automatic enrollment, versus 12 percent a decade ago.
Vanguard research shows that automatic enrollment can more than double participation rates compared with voluntary enrollment plans. This trend is particularly evident among young or low-wage workers, who tend to exhibit lower savings behaviors, according to Vanguard.
In large part, due to autopilot design features, aggregate participation rates are higher than ever and continue to rise, says Vanguard. In 2015, three-quarters of eligible employees participated in their employer’s plan, up from two-thirds 10 years ago.
The Pension Protection Act also sanctioned the use of target-date funds as a qualified default investment alternative. Ninety-eight percent of Vanguard plan participants now have access to target-date funds and 70 percent use them.