Matching Deferral Rates?

Sponsored by: MFS Investment Management 

Once a plan sponsor decides to use an automatic enrollment feature, they must decide a few other items – default rate, default investment option, whether to auto-escalate. Though the default investment option is most commonly a target date fund (85% of plans*), and two-thirds of plans automatically escalate default rates over time (a third automatically as an opt-out and a third voluntarily as an opt-in), the default rate is more variable.  

Much has been pontificated about default deferral rates over the years – the standard was (and is still most commonly) three percent for some reason no one is quite sure of (it was used as an example in guidance 20+ years ago and seems to have stuck?), yet we all know three percent is not enough to build a secure retirement. There was conventional wisdom that you don’t scare people with a high default, you start low then increase (or educate about increasing), then there was research that defaulting at six percent does not increase opt-out rates. For the last few years, we have looked at whether plans automatically enroll participants at a default rate high enough to receive the full employer match or if they enroll lower (and sometimes increase over time).

In last week’s QOTW – two thirds of respondents use automatic enrollment, and of those that do, nearly 60 percent enroll participants at the maximum match rate (57.1% of respondents) and 27.6 percent enroll at a lower rate and escalate to the maximum match rate (or beyond) while only 12 percent default participants at a rate lower than the match rate and leave it there. Select comments follow.

No automatic enrollment:

• Good idea for less savvy employees
• I think they are beneficial.
• If we were ever to move to auto enrollment, we would enroll at the maximum match rate.
• Setting it to receive the full match could be very harsh on an employee's paycheck depending on how large the full match is and what the contribution % has to be to get the full match.  Part of the determination may involve looking at the employer's workforce.  Having a default rate of 5% for a highly paid individual may not have the same negative effective on a paycheck as a low paid hourly worker.   Even though the employer wants to help the employee with starting to save for retirement which is a good thing but taking a large portion of a paycheck may have unintended consequences to the employee.
• They contribute as much as they want as long as they do not go over the yearly max contribution.
• We allow our employees to choose to participate in the 401K. Once they choose to participate they can choose what percentage they would like to contribute and if it is less than or match policy they do not get the full match.
• We have a Safe Harbor plan, so no match. We do not have automatic enrollment.

Default is lower than the match rate:

• Auto enroll is 4% if no enrollment action is initiated.  We match 100 percent up to 7%
• Reconsidering this to add auto escalation and a higher default rate.
• We began auto enrollment three years ago and it has been highly successful in both participant levels and satisfaction.
• We default to 3% which is the $1 for $1 match rate, but we also match .50 on the $1 for 4-5%
• We enroll at 3% but our max match rate is 4%
• We get close to escalating to the max match rate but fall 2% points below it.
• Default at 6% and increase by 1% each year up to 15%
• Default is set at 4% auto enrollment with auto escalation to max
• enroll at 3%, plus one each year until 6% is reached which is our match max
• Has worked well for us for 4 years
• Our employees must defer 10% to receive full match.  This is our way of encouraging them to save enough for retirement since all the information says that this deferral percentage along with our 5 % match will set them up with enough savings to have a comfortable retirement.
• Our Plan is an ERISA SAFE HARBOR plan with QACA details
   

Default is at maximum match rate:

• Default is at 6%.  Match is 50% of first 6% of eligible compensation.
• Just made this change this year.  Will be analyzing change to see if it impacted auto enrollment metrics.
• This is the best value to the employee.
• We also default to auto-escalation of an additional 1% each year up to 15%
• We default at 6% and apply autoincrease to 15% unless the participant makes a different election or subsequent change.
• We have tiered match rates based on seniority but initial enrollment is at max match for a new employee.  If someone is rehired and they have a different seniority date based on previous service, they may not be enrolled at the max rate they are eligible for.
• We match full up to 3% then 50% at 4% and 5%. When we established our 401(k) in 2007, our advisor only recommended safe harbor of 3% and said we were in the vanguard defaulting to max match up to 5%. I’m proud we did.
• We've had no complaints. Deferral rates increased a ton the past few years with auto enrollment and auto escalation.
   

Other (no auto enroll/no match)

• Most people have no idea what 3%, 6%, 10% pre-tax deferral looks like on their take home pay – especially new hires. It does them a disservice to enroll them below the full match. We use an 'easy button' to enroll at 10% pretax, age appropriate TDF and auto escalation. People assume that if we suggest 10% there is a good reason (and there is as you all know). Most people take that easy button route - while others may keep the percentage but change it to Roth. Many others actually increase the amount above 10%. Given the choice and education provided, we have less than 2% of our participants below match deferral rate.
• We do not have a match, our default auto enroll rate is 3%
• We automatically enroll participants and everyone gets a 3% of gross safe harbor contribution but there is no automatic deferral in our plan
• SH nonelective, no match – we still auto enroll at 8% and escalate 1% to 15%.

*From PSCA's 66th Annual survey - now available!