Among all Vanguard DC plans using auto enrollment in 2009, the average participation rate was 86%, where plans using voluntary enrollment had an average participation rate of 59%, Vanguard said in a Web site article about its auto plan design, One Step.
If not implemented carefully, Vanguard said an auto plan design may produce unintended consequences for plan sponsors such as creating a large pool of low savers.
“Although automatic enrollment is an important tool for boosting participation, it may not get participants on track to a financially secure retirement if their deferral rates remain low,” said Ellen Kranick, manager of the Vanguard auto plan program. “Full autopilot plans help resolve that issue by gradually increasing deferral rates.”
According to Vanguard, plan sponsors also can benefit from an auto plan design through:
- A reduction in recordkeeping and administrative burdens,
- An improvement in nondiscrimination testing outcomes,
- An increase in deferral rates for highly compensated employees as a result of improved testing, and
- A mitigation of fiduciary risk.
Auto Deferral Hikes
According to the article, Vanguard recommends sweeping existing participants into the automatic annual deferral increases if their rate is below the rate needed for the full company match.
Kranick believes this is an important element of a successful implementation. “As with eligible nonparticipants, low savers who are already in the plan should have access to the same benefits as new hires,” she said.
In Vanguard plans that use voluntary enrollment, participants have an average deferral rate of more than 6%. But because the dominant default deferral rate for autopilot plans is 3%, new participants in these plans have an average deferral rate of just 3.7%.
According to Kranick, this is why annual deferral increases are such an important part of autopilot plans. Without automatic annual increases, she noted, participants who are automatically enrolled tend to stay at their original deferral rate.
Kranick also pointed out that the early years of saving for retirement are critical, so a 3% initial deferral rate may not be enough, even with annual increases. This is why, when plan sponsors are considering adopting autopilot plan design, Vanguard recommends starting participants at a 4% to 6% deferral rate—preferably 6%.
Balanced Fund Use
The use of balanced funds as defaults has increased tremendously over the past four years, so today, 56% of the default funds used in all plans at Vanguard are target-date funds and 19% are other balanced funds. Among plans designating a QDIA, 80% use target-date funds and 20% use another balanced fund as the default.
Kranick said: “Our research continues to show that target-date funds, in particular, help provide more appropriate diversification for most participants. And we find that once they’re defaulted into a fund, inertia tends to keep them there.”
More information is at http://www.vanguard.com/.
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