More evidence that automatic enrollment succeeds in raising participation rates comes in a new study on South Dakota's Supplemental Retirement Plan.

The analysis found that among government units that adopted automatic enrollment, 91% of new eligible employees are participating in the SRP, compared to the 1% of new hires in units without automatic enrollment. This program could serve as a model for public and private plan sponsors.

The study observed several dozen government units in the first eight months of the program and was commissioned by Retirement Made Simpler and conducted by the Center for State and Local Government Excellence.

Under automatic enrollment, employees are signed up for a plan automatically, at a set amount in pre-determined investment choice. Workers are able to change the amount they save, invest in a different fund and opt out at any time.

"The immediate success in South Dakota affirms that adopting automatic enrollment is one of the most effective ways to increase retirement savings participation by employees," says John Gannon, senior vice president of FINRA, a founding partner of the Retirement Made Simpler coalition.

"This study shows how other states can dramatically aid their employees in preparing for retirement simply by instituting features such as automatic enrollment - and other features such as automatic escalation." Only a few states - including Alaska, Indiana, Virginia and Texas - currently offer automatic enrollment.

In 2008, the South Dakota legislature unanimously voted for the automatic enrollment program because of its concern about the low savings rates of certain demographic groups, uncertainty surrounding the future of Social Security benefits and the decline of personal savings rates nationwide.

"State employees have a strong combination of retirement benefits, including a pension, but the supplemental retirement savings plan is also integral to retirement security," explains AARP's South Dakota State Director, Sarah Jennings. "By unanimously approving the authorization of automatic enrollment into the SRP, the legislature followed the lead of many private sector companies who have found automatic features extremely helpful in getting employees to save earlier than they might otherwise do and, in so doing, grow their retirement nest egg."

When should 401(k) plans automatically escalate?

By Howard J. Stock

Most 401(k) participants want automatic escalation to kick in at age 45, according to a survey of 300 workers.

Sixty-seven percent of respondents wanted automatic escalation of at least 1% when they reach age 45. Forty-five percent of participants in defined contribution plans would be happy if their employer signed them up for automatic escalations of 2% or more per year after they hit age 45.

Consumers, it seems, are getting used to the idea of not being fully in control of their retirement savings.

Of the 300 respondents, 38% had been automatically enrolled in their company's 401(k) plan, 21% had automatic escalation in place, and 16% had both. "Sometimes inertia takes over and employees need to be nudged," says Marie Rice, LIMRA's research director.

Many plan sponsors are hesitant to introduce auto-enrollment or auto-escalation, although they are entitled to under the Pension Protection Act, because they worry employees will see the move as patrician, but according to these findings, that's what employees want to happen.

"An auto-boost helps them overcome inertia," Rice says. For advisers, the study's findings give them supporting evidence when talking to reticent business owners, she adds.

Prior LIMRA research indicates that most people age 55 to 70 (70%) consider themselves ill-prepared for retirement. Only 15% of participants in this survey had increased their defined benefit contribution in the past year, and 42% have never changed their investment allocations.

Stock is the editor of Bank Investment Consultant, a SourceMedia publication. Follow EBN on: Twitter | Facebook | LinkedIn | Podcasts

Register or login for access to this item and much more

All Employee Benefit News becomes archived within a week of it being published

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access