Higher Default Rates Don’t Discourage Enrollment. That 3%-4% default contribution rate in your retirement plan? You can potentially dial that up to as much as 11%* without scaring off participants. Yes, really.
A new report called “How Do Consumers Respond When Default Options Push the Envelope?” found that higher default rates do not actually discourage enrollment. The research was sponsored by Voya Financial and co-authored by Shlomo Benartzi, a professor at the UCLA Anderson School of Management.
An article from the Society for Human Resource Management (SHRM) summarized the methodology and findings:
“[The study] involved 10,000 employees who visited a workplace retirement plan enrollment website between November 2016 and July 2017. After entering basic personal information, employees were prompted to select a randomly assigned retirement savings contribution rate of 6 percent (the control group) up to 11 percent. Researchers waited 60 days after a person’s website visit before collecting data on how plan participation was affected.
Among the study’s findings:
▪ Suggesting rates between 7 percent and 10 percent did not result in lower enrollment when compared to a 6 percent control rate. The highest rate suggested —11 percent—resulted in only a slight drop in enrollment.
▪ Higher savings rates can lead to meaningful improvements in the financial security of plan participants. Raising the default rate from 4 percent to 8 percent, for instance, can much more than double an account’s value long term, due to earnings on invested dollars.”
The takeaway is that plan sponsors should consider hiking their deferral rates beyond 3% of pay — the most common default rate. Ultimately, retirement plan success is largely a function of the default percentage, so given that, plan sponsors should be concerned that the currently accepted default rates are way too low to accommodate future retirement income needs.
Uncomfortable with moving your default deferral rate from 3% to 8% or higher right off the bat? Consider increasing the default contribution rate for new hires, who are new to the plan and, as such, don’t know any better. Raising the default rate for existing employees is a more delicate process that requires detailed and persuasive communication — for example, educating them on how a larger default contribution rate can have a sizable impact on boosting their income and standard of living in retirement.
Finally, if your plan has a cap on the default rate, you might consider removing it. After all, if employees want to save more for retirement, why prevent them from doing so? Higher deferral rates should lead to higher rates of retirement success, and that’s a scenario where everybody wins.
*For those unfamiliar with the reference from the classic film “Spinal Tap” in the introduction,
