Perspectives : DC Retirement | September 21, 2023

Inertia can be your participants’ best friend

Read time: 9 minutes

Vanguard Senior Analyst Jeff Clark discusses the positive effects of automatic solutions on plan design and participant behavior and offers practical tips to plan sponsors to help improve their plan designs. 

Next to “All-time high 85% participation rate” is a photo of Vanguard’s Jeff Clark. There’s a link to a video in which Jeff discusses how plan designs grew stronger in 2022 thanks to automatic solutions.

Video Length: 3:58

As Vanguard’s Jeff Clark discusses in the video above, the 2023 edition of Vanguard’s annual research publication How America Saves shared some really good news: Plan designs—those features that make up the basic framework of a retirement plan—are getting stronger.

A strong, solid plan design is essential to helping your participants get going on the road to a brighter financial future—and stay on it along the way.

Why? Because a strong plan design just makes things easier for your participants. Easier for them to:

  • Join their plan and start saving (faster, too).
  • Save more once they’re onboard.
  • Choose investments that could be best for them.
  • Receive steady income from their savings once they retire.

Harness the unstoppable power of inertia

In the past, employees joined their retirement plan by physically completing an application. They were also responsible for choosing their investments and deciding how much to save. And then once enrolled, they needed to decide when, and if, to save more. 

But the Pension Protection Act of 2006 changed all that with the introduction of automatic solutions. In the intervening years, automatic solutions have become a cornerstone of a strong plan design, and many tasks that once were manual now just happen . . . automatically.

Of course, ease of use is one thing, getting results is quite another. And How America Saves 2023 shows that the key to a plan design that can get results is having a suite of automatic features. 

Automatic enrollment—The first step to retirement readiness

A key component of an automatic-oriented plan design is automatic enrollment. Employees are defaulted into their plans and must manually opt out if they don’t want to participate—turning the tables on what is rapidly becoming an archaic system.

In 2022, 58% of DC retirement plans offered an automatic enrollment feature. Even better, in plans with at least 1,000 participants, 76% offered one. And automatic enrollment adoption has been on a steady rise since it was first introduced more than a decade ago.

Further, plans with automatic enrollment had a 93% participation rate, compared with 70% for plans with only voluntary enrollment.

Plans with automatic enrollments can also help boost saving. In 2022, employees automatically enrolled into their plans saved nearly 40% more than employees in voluntary enrollment plans.

Couple that with the 11% average total saving rates of employees in automatic enrollment plans (compared with 8% in voluntary enrollment plans), and it’s apparent that automatic enrollment is beneficial in helping American workers achieve better outcomes.

Enrollment is just the beginning

Automatic enrollment will get an employee’s foot in their plan’s front door, but that can take them only so far.

For powerful results, sponsors can consider adopting a suite of automatic solutions that encompass saving more, meeting the match, and enrolling participants in the plan if they aren't already.

Automatic increases—Small nudges can make a big difference

In 59% of plans last year, employees were defaulted in at a saving rate of 4% or more, a figure that’s nearly doubled over the past 10 years.

That’s a great start. But sponsors can go even further and follow the lead of nearly 70% of plans that offer an automatic increase option. Automatic increases take full advantage of inertia to help participants save as much as they can.

For a more comfortable retirement, we suggest plan participants save at least 12% to 15% of their pay, which includes employer contributions. It’s a daunting figure for some, as we can see by the average employee deferral rate of 7.4% in 2022.

But when participants agree to automatically increase their saving rate even a little each year, what seemed impossible becomes doable. While most plans enroll participants at an annual increase of 1%, some employ 2% default, enabling employees to reach their target saving rate in half the time. 

Boost savings with matching funds

When sponsors throw employer contributions into the deferral mix, participants get a boost of savings that can get them closer to our suggested saving rate of 12% to 15%. The average combined deferral rate last year was 11.3%, considering both participant and employer contributions.

If participants simply can’t save that much however, we suggest saving at least enough to get their employer’s full matching contribution—which can sometimes be more than a plan’s default saving rate.

Undersaver sweeps can automatically increase the deferral rates of participants saving below the maximum match level to a rate that will get them the maximum matching contribution. Meeting the maximum match is an important first step in helping participants save at our suggested saving rate.

Encourage nonparticipants to enroll

Sometimes, for whatever reason, an employee may feel that it’s simply not a good time to join their plan. Everyone’s journey is different. However, over time, their circumstances can change, and the possibility of enrolling becomes more attractive—even if they’re not sure how to take the first step.

Reenrollment sweeps alleviate that uncertainty by automatically bringing nonparticipating employees into their plans at their regular default rate and into their regular default fund.

Go beyond automatic solutions with TDFs and advice

Automatic solutions are like the moving sidewalks of plan design. A single step can get participants in the plan and keep them moving. But they’re not the only elements of a strong plan design. 

Sponsors also can consider defaulting participants into an age-appropriate target-date investment and introducing one (or more) of our advice services. We’ll dig into these options in future articles.

Meanwhile, how do you create a strong plan design? Start by getting in touch with your Vanguard representative. We’re ready to help you implement all of these solutions so you can help your participants move closer to retirement success.

And for a lot more insight into plan design and participant behavior, be sure to check out How America Saves 2023.  


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Jeffrey W. Clark

Senior Research Analyst, Strategic Retirement Consulting