However, a report based on data from 616 defined contribution plans exclusively recordkept by Fidelity Investments as of June 30, 2011, Defining Excellence:A Report on Retirement Readiness in the Not-for-Profit Healthcare Industry, says not-for-profit healthcare plans with auto-enrollment have an average participation rate of 80% – dramatically higher than the 48% average participation rate among plans without auto-enrollment.
The uptake of auto-enrollment in the not-for-profit healthcare industry is not as high as it could be; only 27% of plans offer auto-enrollment.
Fidelity noted that plans that adopt auto-enrollment must choose whether to apply it to newly hired employees only or to new and existing employees. From Q2 2009 to Q2 2011, 76% to 79% of plans have consistently opted to automatically enroll only new employees.
The data indicates that savings rates had little effect on opt-out rates. Specifically, the employee opt-out rate falls in a range of 8%–14% regardless of the plan’s default savings rates – suggesting plan sponsors can choose auto-enroll savings rates of 5% or 6% without significantly decreasing plan participation.
The average savings rate for not-for-profit health care participants is 7.1%, down from a recent high of 8.0% in Q2 2007. However, only 46% of not-for-profit healthcare participants are deferring 6% or more. The overall 7% average is skewed upward by a number of participants saving 10% or more of their salary.
According to the report, the most effective plan design tool to increase participant savings rates is the Annual Increase Program (AIP), which automatically increases participants’ savings rates every year by a set amount—usually 1% increase per year and generally up to a maximum of 10%. Approximately half of retirement plans in the not-for-profit healthcare industry offer AIP.The Fidelity data shows approximately one-quarter of all savings increases from July 1, 2010, through June 30, 2011, can be attributed to AIP or auto-AIP. When combined with auto-enrollment, participation in AIP leads to substantially higher average savings rates. Specifically, the average savings rate among those with auto-enrollment is just 4.0%; the average savings rate of participants with auto-enrollment and AIP is significantly higher at 6.8%.
Participant Education Increases Positive Savings Behaviors
According to the Fidelity analysis, substantial numbers of participants who use retirement and investment planning tools are likely to take constructive action to manage their retirement plan accounts.
On average, 43% of those who complete an interaction using a guidance tool subsequently take action such as a change in deferral, investment mix, or investment exchange. One-quarter of participants completing a guidance-tool interaction chose to increase their savings rates. In many cases, such increases are substantial—more than doubling from an average of 4.9% savings rate up to 11.2%. The largest increases are seen among older participants.
Despite their effectiveness, less than 10% of not-for-profit healthcare retirement plan participants complete guidance tool interactions—providing a large opportunity for plan sponsors and participants, Fidelity says.
In addition, the report says more than 85% of participants in their early twenties have an asset allocation aligned with their age and a target retirement date of age 65. That number drops below 40% among those ages 65 to 69. The reason for this drop is largely due to the greater number of younger participants being auto-enrolled and thus utilizing their plan’s default investment, which is in many cases a target-date fund.
For pre-retirees ages 55 and higher, many may have asset allocations that are either too aggressive (100% equities) or too conservative (100% fixed annuities or money market funds). Sixty percent of participants in not-for-profit healthcare plans (across all segments) hold age-based asset allocations, up from just 38% five years ago.