George Castineiras, senior vice president of Total Retirement Solutions at Prudential Retirement, told PLANSPONSOR the number of Prudential clients utilizing auto enrollment increased from 20% in the fourth quarter of 2011, to 31% in the same quarter a year later. Plans using auto escalation increased from 9% in the fourth quarter of 2011, to 17% in the same quarter 2012.
One reason for an increase in auto enrollment and escalation could be “social responsibility,” as Castineiras described the increase in saving after the recession—similar to the financial discipline that occurred after the Great Depression. “Part of what happened in 2008 became a catalyst for [saving],” he said.During the recession, younger generations witnessed Baby Boomers struggle to handle retirement needs, which prompted them to take a more proactive role in their financial futures, he added.
The industry as a whole has also realized the defined contribution (DC) space needs to be modeled after defined benefit (DB) plans, which is prompting more auto options. “Everyone’s watching the auto path taking hold,” Castineiras said.
Throughout the industry, the use of auto enrollment seems to be increasing more substantially than auto escalation, which still holds a rate of about 1% per year across the industry, according to Castineiras.
Regarding auto enrollment, the average deferral rate has not changed radically since the 2006 Pension Protection Act (PPA) was passed (a 2% to 4% deferral rate, on average), but momentum is starting at a 5%-plus deferral rate, and Prudential encourages participants to reach a deferral rate of at least 10%, Castineiras said. Although PPA was a great catalyst for plan design, the industry has collectively realized participants need a much higher deferral rate than 3%.He added that plan sponsors have for the most part adopted a retrospective approach to auto enrolling participants—re-enrolling all participants with an opt-out option versus opt-in.
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