Autoenrollment and the importance of the default

October 15, 2021

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Automatic enrollment is a powerful strategy proven to increase retirement plan participation, but the newest—and last—edition of Nudge, a seminal book on behavioral finance coauthored by Nobel laureate Richard H. Thaler, stresses that the benefits of the popular strategy depend largely on how it is implemented.

Thaler cites Vanguard research paper Automatic Enrollment: The Power of the Default to support his conclusion. The paper draws from Vanguard recordkeeping data. Published initially in 2018, it has been updated with data through June 2020.

Participation rates

Vanguard 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's 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.
Participant contribution rates under automatic enrollment with an annual increase

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.

Of course, this highlights the importance of the default, and as Thaler points out—and we concur—a plan is only as good as its default.

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.
Participation rates for plans with automatic enrollment

Plan 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 How America Saves 2021—an examination of retirement plan data from nearly 5 million DC plan participants across Vanguard's recordkeeping business. Now in its 20th edition, How America Saves details how thoughtful retirement plan designs leverage automatic solutions, from both a savings and investment perspective, to help improve participant outcomes. It also provides plan sponsors and consultants with actionable insights to implement plan design that enhances participants' financial well-being.

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

Read the report


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