Auto Increase of Participant Deferrals Gets Results. At the Fiduciary Education Program at held at Southern Connecticut State University in New Haven, Connecticut, Fred Barstein, Founder and CEO of The Plan Sponsor University (TPSU), interviewed one of the program attendees, Cynthia, who Manages Administration at a mid-sized company with approximately 65 employees.
Over the years Cynthia’s firm has offered a 401k plan to eligible employees. This by itself is not unusual since over 550,000 companies offer 401k plans. What is unusual is that her company has participated in “auto increase” of the employee deferrals for the last 5 years!
Surprising Reaction from the Plan Participants
The practice of automatically increasing a 401k plan participant’s salary deferral is relatively new in the retirement industry. The concept has been discussed for a longer period; however, when plan sponsor actions impact a participants’ paycheck, plan sponsors have been slow to take action. Since Cynthia’s company has been using auto increase for over 5 years, they are a good example of what auto increase can do for plan participants. It is normal for a company to auto increases participants’ deferral percentages by 1% per year, every year, up to a total deferral amount of 10 percent.
The company anticipated that by instituting auto increase within the 401k plan there would be complaints and push-back from the participant base. To the complete surprise of the company, there was no resistance and no complaints from the participants when the company instituted auto increase.
What can Plan Sponsors Expect?
In the 2016 Vanguard Study, “How America Saves 2016” the participant contribution rates to defined contribution plans, including 401(k) plans, vary depending on age and income, however, the average worker deferred 6.8% of their compensation during in 2015.
In the book Nudge, Richard Thaler of the University of Chicago and Cass R. Sunstein point out that any plan design change will impact participant behavior.
So it comes as no surprise that in Cynthia’s case, where the employee deferrals are automatically increased each year up to 10%, the 401k participant deferrals are 30% higher than the industry average.
