Study Supports Use of Auto Features in Public-Sector 457 Plans

The state of South Dakota has experienced good results since implementing automatic enrollment and automatic deferral escalation in its 457(b) plan.

A follow up to a study done in 2010 finds automatic enrollment and automatic escalation can help public-sector 457(b) plans increase participation and savings rates for employees.

Public-sector employees are typically enrolled in a defined benefit (DB) plan, and this often leads to low participation rates in supplemental defined contribution (DC) plans. In 2009, the South Dakota legislature passed a bill allowing for automatic enrollment in the state’s Supplemental Retirement Plan (SRP). An initial study found that eight months after the passage of automatic enrollment legislation, 91% of new, eligible employees whose units chose to implement automatic enrollment participated in the plan and remained in it. The study found only 1% of employees in government units that had not implemented automatic enrollment voluntarily enrolled in the SRP.

The new research from the Center for State and Local Government Excellence shows that the proportion of workers contributing to the SRP among those automatically enrolled declines with additional years of employment. For example, for those hired in 2010 who were automatically enrolled, the participation rate fell to 80.5% in 2016.  However, this is still significantly higher than for workers in agencies that did not adopt the auto enrollment policy.

From the initial passage and implementation of the SRP automatic enrollment law, most of the stakeholders involved viewed the default $25 per month deferral as an initial starting point but not enough to generate necessary, meaningful savings, even over a longer term. A bill was passed unanimously by both chambers of the South Dakota legislature in January and February 2015 and signed into law by Governor Dennis Daugaard, becoming effective on July 1, 2015. For any government entity that adopts the escalation policy, it applies to all automatically enrolled members and increases the employee contribution rate to the SRP by $10 per month each year of employment. As of November 2017, of the 50 employers who adopted automatic enrollment, 20 also opted for automatic escalation.

According to the study, in both 2015 and 2016, approximately 75% of employees that were automatically enrolled were also covered by automatic escalation. Further analysis of the hiring data reveals that of the 4,948 hires in fiscal year 2015 who were still employed in 2016, 2064 (41.7%) were automatically enrolled and of those, 1,523 (73.8%) have automatic escalation. Of the new hires in 2015 who have automatic escalation, 95.2% kept making a contribution in 2016. The percentage decreases to 93.6% for the new hires automatically enrolled but who do not have automatic escalation.

The Center notes that the results highlight the positive response of individuals to automatic plan features even when they participate in a primary DB plan and Social Security. The full study report is here.