John writes, "This mechanism would be even more useful, especially for younger workers and those with low-to-moderate incomes, if retirement savings plans also allowed employees to save for unexpected expenses."
He notes that studies found that low-to-moderate income households are saving for near-term small emergencies. "However, those situations happen so often that they prevent households from building up higher savings for larger emergencies. A split auto enrollment plan would help them to have money for those bigger problems."
In 2015, 22 percent of Americans indicated they are very confident (up from 13 percent in 2013 and 18 percent in 2014), while 36 percent are somewhat confident. Twenty-four percent are not at all confident.
The report also acknowledges that, while automatic enrollment increases participation rates, “it also leads to lower contribution rates when default deferrals are set at low levels, such as 3 percent or lower.”
Among automatic enrollment plans:
49 percent enroll participants at a 3 percent rate, and 15 percent chose a 4 percent default in 2014.
70 percent increase contribution rates annually. Forty percent of plan sponsors cap contribution escalation at 10 percent, but a quarter set caps between 12-50 percent.
Another positive trend is the half of plans automatically enroll all eligible non-participants, not simply new hires.
Among plans that automatically enroll employees, 7 in 10 use all three features of automatic plan design: auto-enrollment, auto-escalation and automatic allocation through balanced funds.
A new working paper from the Center for Retirement Research at Boston College finds that automatic enrollment is associated with a higher proportion of workers included in defined contribution (DC) plans—but also concludes that automatically enrolled workers are less likely to contribute to their DC plans than voluntarily enrolled workers.
How do you improve the situation? The authors suggest that plan sponsors could offer a more generous employer match and use auto escalation.