New analysis from The Principal shows automaticenrollment features in 401(k) plan designs can drive better savingsbehavior without dramatically affecting participation.

However, Barrie Christman, vice president of individual investorservices at The Principal points out most plan sponsors tend to settheir default rate at an insufficient level.

Employers offering automatic enrollment in 401(k) plans mustchoose a default investment fund and savings rate, requiringemployees to actively opt-out if they choose not to participate.Participating employees accept the default fund at the defaultrate, or select different funds and rates.

Client data from The Principal shows that plans with anautomatic enrollment feature defaulting at 3 percent¹produce an average deferral of 6.3 percent. This is lower than theaverage deferral of 6.8 percent for plans without an automaticenrollment feature². In contrast, the average deferralis 7.1 percent for plans that have a 6 percent default automaticenrollment feature³.

Most participants automatically enrolled in their plan sponsor’sretirement plans either accepted the default rate or chose to defereven higher, even as the default rate increased from 3 percent to 6percent. In fact, at a 3 percent default rate, twice as manyparticipants chose to defer more (36 percent) rather than opt outcompletely (15 percent) or at a rate lower than the default (3percent).

The following tables compare participant deferral rates at a 3percent default and a 6 percent default:

Participation rates

Automatic enrollment significantly boosted participation inretirement plans. The data reveals a 20 percent increase inparticipation in plans with an automatic-enrollmentfeature⁶ compared to participation in plans without thefeature⁷.

Further, automatic enrollment at 6 percent increased opt outs byjust 4 percentage points (19 percent) over the 3 percentautomatic-enrollment deferral rate (15 percent).

Savings rates with employer match

Client data indicates that combining automatic enrollment withan employer matching contribution helps drive an even bettersavings rate. The tables below show the savings rates ofparticipants who are both automatically enrolled and receive astated employer match:

Nearly twice as many participants (61 percent) reach an overallsavings rate greater than 11 percent when their employers’ plandefaulted them at 6 percent rather than 3 percent (32 percent).Twenty-eight percent of participants in plans with a statedemployer match but without automatic enrollment¹⁰ save11 percent or more.

“In order to generate sufficient retirement income, we believemost retirement plan participants should be saving 11-15 percent oftheir pay—including employer match—throughout an entire workingcareer,” Christman said. “It’s clear that participants who areautomatically enrolled at a higher level are more likely to hitthat all-important savings range.”

Christman added that implementing an auto-escalate program,which automatically increases participants’ deferral amounts bycertain percentages over set amounts of time, along with automaticenrollment is another way for plan sponsors to help participantsreach their retirement savings goals. “Our data supports couplingthe two programs to achieve the most successful plan design,especially if the automatic enrollment default rate is lower,” shesaid.