Research & commentary

Retirement

The power of autoenrollment

March 9, 2021

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Automatic enrollment is a powerful strategy proven to improve retirement plan participant saving and investment behavior, but its effects vary depending on the plan design, according to recently updated Vanguard research.

Automatic Enrollment: The Power of the Default draws from Vanguard recordkeeping data. Published initially in 2018, the paper was updated with data through June 2020.

Participation rates

Our analysis suggests automatic enrollment's default effect is strongest in influencing participation rates, with 9 in 10 automatically enrolled new hires remaining in their employer plan after three years.

Participation rates for plans with automatic enrollment

Employees hired between January 1, 2017, and December 31, 2019, as of June 30, 2020.

A stacked bar chart that shows the proportion of participating employees and not-participating employees in automatic enrollment plans, using data about cohorts of employees hired between January 1, 2017, and December 31, 2019, as of June 30, 2020. The first stacked bar shows participating employees during the 7-to-12-month period was 92% and not-participating employees was 8%. The stacked bars show six-month increments. For the 37-to-42-month period, 92% of employees were participating and 8% were not participating.

Its effect on portfolio choice is also strong, with 8 in 10 participants contributing exclusively to the default option after three years, and another 17% contributing to the default and other plan investment options.

The default effect for an automatic increase feature is not quite as strong. However, after three years, about two-thirds of eligible participants remained in the automatic escalation default, and a sizable minority raised contribution rates while ending the autoincrease feature.

Contribution rates

Automatic enrollment raises the minimum, or "floor," contribution rate in a DC plan by replacing zero-contributors with participants saving generally at 4% or higher.

Participant contribution rates under automatic enrollment with an annual increase

Participants hired between January 1, 2017, and December 31, 2019, as of June 30, 2020.

A stacked bar chart that shows the proportion of participants in plans with automatic enrollment and automatic annual increase taking one of five actions in six-month increments. The data encompasses cohorts of employees hired under automatic enrollment between January 1, 2017, and December 31, 2019, as of June 30, 2020. The first stacked bar shows participants during the 7-to-12-month period: 59% remained at the default saving rate with an annual increase; 14% increased the default saving rate and retained the annual increase; 15% increased the default saving rate and dropped the annual increase; 5% remained at the default saving rate and dropped the annual increase; and 7% lowered the default saving rate and dropped the annual increase. For the period 37 to 42 months: 47% remained at the default saving rate with an annual increase; 17% increased the default saving rate and retained the annual increase; 26% increased the default saving rate and dropped annual increase; 4% remained at the default saving rate and dropped the annual increase; and 6% lowered the default saving rate and dropped the annual increase.

Sponsors can seek to improve retirement outcomes through automatic enrollment combined with higher initial deferral rates, an automatic increase feature, and a total automatic increase cap of at least 10%.

How to further improve outcomes

Another important method to improve outcomes is to extend the automatic enrollment design from only new hires to all eligible nonparticipants. Plan sponsors should consider using the power of inertia by employing various types of sweeps, such as reenrollment, undersaver, and automatic increase sweeps.

This analysis underscores the importance of plan design defaults, the role of inertia in retirement saving decisions, and the impact of employer plan design decisions on retirement adequacy among DC plan participants.

The importance of defaults, as well as other plan design features, is further detailed in our preview of How America Saves 2021—an examination of retirement plan data from nearly 5 million DC plan participants across our recordkeeping business. How America Saves will mark its 20th edition this summer. This preview details how thoughtful retirement plan designs leverage automatic solutions, from both a savings and investment perspective, to help improve participant outcomes.

All things being equal, stronger default designs will help improve retirement outcomes because of the effect of inertia. Sponsors should seek to take advantage of this behavioral bias when designing their DC retirement programs.

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Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Diversification does not ensure a profit or protect against a loss.
 
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