Many Workers Don’t Stick With Automatic Savings Rate Increases

Researchers at the Rand Corporation looked at 206 auto-enrollment retirement plans to see whether automatically increasing savings rates results in workers sticking with the default rate or following a more active approach.

One of the trends in workplace retirement plans [e.g., 401(k) plans] has been the use of automatic escalation. The percentage of an employee’s salary contributed to retirement savings is increased on a regular basis, such as on calendar-year intervals. It can be automatic (“automatic auto-escalation”) or it can be voluntary. In both cases, workers can choose to save a different percentage of their salaries.

Though the intent is good, little is known about whether automatically increasing savings rates results in workers sticking with the default rate or following a more active approach. Researchers at the Rand Corporation looked at 206 auto-enrollment retirement plans run through Vanguard with more than 102,000 employees hired between 2010 and December 2013. Nearly 79% of these plans automatically enroll participants into the automatic-escalation feature.

Participants in plans with automatic auto-escalation were more likely to alter their contribution rates. Just under 59% of employees in such plans chose a different contribution rate, versus 55% for those in plans with no auto-escalation feature and 49% for those in plans with a voluntary auto-escalation feature. About 25% of workers in plans with automatic auto-escalation opted for a contribution rate different than the default rate at enrollment. Notably, those in plans with no automatic escalation were more likely (31%) to choose a different contribution rate at enrollment.

Higher-than-default contribution rates were more prevalent among workers in plans with no auto-escalation feature. This trend held during all four years of participation studied. Among workers in plans with an automatic auto-escalation feature, one-third boosted their contribution rates above the default. Workers who contributed more than the default rate allocated, on average, 8.29% of their salaries to their retirement saving plans.

On the other hand, lower-than-default contribution rates were also more prevalent among those participating in plans with automatic increases. The proportion of workers in automatic auto-escalation plans saving less than the default rate increased from 11% in year one to 42% in year four. By means of comparison, just 12.4% of workers in plans with voluntary auto-escalation and 7.9% of workers in plans with no auto escalation contributed less than the default rate by year four.

Source: “Opting out of Retirement Plan Default Settings,” Jeremy Burke, Angela A. Hung, and Jill E. Luoto, RAND Labor, January 2017.