Push 401(k) Default Savings Rates Higher, Researchers and Plan Sponsors Agree

Few workers react negatively to 'pushing the envelope' on default savings rates

Stephen Miller, CEBS By Stephen Miller, CEBS October 27, 2017
Push 401(k) Default Savings Rates Higher, Researchers and Plan Sponsors Agree

Erring on the high side when choosing a 401(k) savings default-contribution rate won't likely discourage employees from participating in the plan, new research suggests. Plan sponsors' experiences seem to back up this finding.

"Many employers are reluctant to suggest higher contribution rates due to a concern that their workers might get intimidated and opt out of the plan altogether," said Shlomo Benartzi, a professor at the UCLA Anderson School of Management and co-author of a new report, How Do Consumers Respond When Default Options Push the Envelope? "However, no one had researched these concerns using a scientific approach. Would plan participants accept a 7, 8 or 9 percent savings rate? Can we push it even higher into double digits? Through this study, our team found these preconceived fears were largely unwarranted," Benartzi said.

Higher Rates Did Not Deter Enrollment

The research, sponsored by Voya Financial, which provides retirement plan services, 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 led 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 findings suggest that "employers shouldn't worry about 'pushing the envelope' and suggesting higher levels," said Richard Mason, head of behavioral finance at Voya Financial. "Rather, they should be more concerned about rates that are too low to meet future retirement needs."

While there has been significant progress in the adoption of automatic plan features, he noted, "a natural next step could be for employers to consider substantially increasing the most commonly used default rate today—3 percent—in auto-enroll plans."

Update: According to institutional investment firm Callan's 2018 Defined Contribution (DC) Trends Survey report, large plan sponsors polled in the fall of 2017 reported the highest average auto-enroll default contribution rate in the survey's history—4.6 percent.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Why Stop People from Saving?

With automatic enrollment in 401(k) plans, "retirement success depends on what the default percentage is," said Wayne Bogosian, president and managing director of PFE Advisors, a retirement plan design, investment advisory and financial education consulting firm in Southborough, Mass.

"Over 90 percent of our clients have automatic enrollment, and we've been talking with them about getting their default-savings rates up from 1, 2 or 3 percent of employee pay to a 6, 7 and 8 percent default," said Bogosian, who was part of a Sept. 20 panel discussion on 401(k) trends at the EBN Benefits Forum and Exposition, held in Boca Raton, Fla.

When he speaks with retirement plan fiduciary committees about raising their plan's default savings rate, "The pushback is 'Whoa, that's way too big of a jump.' But honestly, the pushback from the participants is nonexistent" when the rate is raised, Bogosian said.

Plan sponsors can take different approaches, he noted, such as raising the default rate for new hires only, "which has minimal pushback because the participant doesn't know any different. If you want to raise the default rate for current participants, which we recommend, you have to pause for a moment and talk about the financial impact" by explaining to employees how retirement savings success depends on a robust default percentage.

Sarah Sardella, senior director of global benefits at Akamai Technologies, headquartered in Cambridge, Mass., was on the panel with Bogosian and shared that her firm sets the savings default at 8 percent.

"Our match is 50 percent up to 8 percent of pay, so with anything less than 8 percent, we'd be setting participants up to miss out on match dollars, which we feel is inappropriate."

At Akamai Technologies, the default rate also automatically increases 1 percent a year. "We used to have a cap, so it went up a percent each year until it hit 10 percent," Sardella said. "We took the cap off the auto increase because participants can opt out at any time, so why would we stop people from saving?"

17-1423 Automatic Enrollment 3.jpg

Source: Callen Associates' 2017 Defined Contribution Trends survey report. Callan fielded the survey in the fall of 2016 and received responses from 165 primarily large and mega 401(k) plan sponsors.

Employers' Contributions Rise, Too

Employers' annual contributions to their workers' defined contribution plan accounts rose to 4.8 percent of participants' pay in 2016, up from 3.8 percent in 2006, a recent survey shows.

Participation rates in 401(k) and similar defined contribution plans saw a steady increase, the survey of 590 defined contribution plans by the nonprofit Plan Sponsor Council of America (PSCA) found.

Related SHRM Articles:

Employers Are Raising 401(k) Default Savings Rates to 6%, SHRM Online Benefits, April 2016

Dollar-for-Dollar Is Now Most Common 401(k) Match, SHRM Online Benefits, October 2015

Most 401(k) Participants Favor Auto Escalation, SHRM Online Benefits, July 2014

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.



Hire the best HR talent or advance your own career.

Are you a department of one?

Expand your toolbox with the tools and techniques needed to fix your organization’s unique needs.

Expand your toolbox with the tools and techniques needed to fix your organization’s unique needs.



HR Daily Newsletter

News, trends and analysis, as well as breaking news alerts, to help HR professionals do their jobs better each business day.