Savings Concept Automatic enrollment results in lower savings rates, as workers often fail to save more than 3 percent—the most common automatically set savings rate. (Photo: Shutterstock)

A new study sponsored by TIAA sets out to parse the reasons why participants in defined contribution plans behave they way they do when defaulted into plans at a 3 percent deferral rate.

Policy experts across the retirement industry have noted automatic enrollment’s role in increasing participation rates in voluntary savings plans over the past decade.

But the design feature has hardly been a panacea, as studies from economists and record keepers have shown automatic enrollment results in lower savings rates, as workers often fail to save more than 3 percent—the most common automatically set savings rate.

TIAA’s study, produced by a team of five economists, surveyed data from roughly 5,500 government workers in the Thrift Savings Plan, which implemented an automatic enrollment feature with a 3 percent deferral rate in 2010.

Related: Are you ready to jump on the auto-enrollment and auto-escalation bandwagon?

The optional plan, offered alongside a mandatory defined benefit plan, gives a 1 percent contribution from the government to all employees, and an additional match of up to 5 percent of pay. The government offers a dollar-for-dollar match on the first 3 percent of pay employees defer, and another $0.50 on the dollar for the next 2 percent of deferrals.

About 9 percent of employees enrolled before auto enrollment contribute nothing, whereas 15 percent enrolled after contribute 3 percent.

Another 19 percent of pre-auto enrollment participants contribute 5 percent of salary, compared to 31 percent of post-auto enrollment participants.

Those numbers support the value of auto enrollment, but as has been found in other studies, TIAA’s survey shows participants saving before auto enrollment have higher average contributions.

About 13 percent of pre-auto workers contribute the statutory maximum—more than twice the rate of post-auto participants. And the average deferral for pre-auto workers is $8,460, compared to $5,223 for post-auto workers.


Different reasons for stagnate deferrals

The economists test three reasons to explain saving habits in the TSP plan: procrastination, financial literacy, and what the study calls “exponential growth bias,” or the extent to which participants understand the compounding value of saving in a retirement plan.

For participants that were automatically enrolled, the study finds that procrastination most explained why savers stayed at the 3 percent deferral rate.

For savers that self-enrolled before 2010, poor financial literacy and a lack of understanding of compound growth explained deferral stagnation.

The study says those findings are “novel” relative to the economic body of work on savings habits, and have implications for how sponsors and policy makers address saving shortfalls.

“In particular, it suggests that the ideal tools and assistance designed to aid participants’ saving decisions may vary based on the default regime,” the report says.

“While we have known for some time that retirement saving decisions are driven by defaults, it is equally important to understand how and why they influence behavior,” said Gopi Shah Goda, an economist at Stanford University and one of the study’s authors.

“Our study sheds light on the underlying mechanisms and provides evidence that procrastination tendencies, financial literacy and the understanding of compound interest are at play, but the precise channel depends on the underlying default choice offered to participants,” she added in a statement. “These findings inform how employers can design retirement plans and suggest that mitigating procrastination can have large implications for retirement saving decisions.”