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Adoption of Auto Features Climbs, But Growth May Slow

Practice Management
A new study finds that a significant percentage of plan sponsors have embraced the use of automatic plan design features, but adoption may have “plateaued” to some degree. 
 
First fielded in 2010, the fifth edition of the Defined Contribution Institutional Investment Association’s (DCIIA) plan sponsor survey reveals that 69% of plans currently offer auto enrollment, up from 60% in 2016. And that finding generally holds true for both large and small asset-size cohorts. Nearly three-quarters (73%) of plans with over $200 million in assets have now adopted the feature, up from 67% in 2016, while 63% of plans with less than $200 million in assets have now adopted it, up from 51% in 2016. 

The study’s written report, which includes contributors Warren Cormier of DCIIA’s Retirement Research Center, Catherine Collinson of the Transamerica Institute, and Josh Dietch of T. Rowe Price, notes that the most common default (74%) is for all new hires to be enrolled, while periodic sweeps are only used by about 20% of plan sponsors. 

 
Despite those findings, future adoption of auto enrollment may slow. The survey finds that only 7% of plans not currently offering auto enrollment say they are “very likely” to do so in the next 12 months. Another 14% of respondents indicate they’re “somewhat likely” to do so. The most frequently cited barriers are:
 
  • a possible increase in record-keeping expenses; 
  • appearing too paternalistic; 
  • being deemed unnecessary, as participation is already high; 
  • costs being too great (due to the match required); and
  • concern over possible employee complaints. 
Auto Escalation 
 
Adoption of auto escalation also continued to grow rapidly and is approaching auto enrollment adoption levels, but it may also be reaching its maximum adoption level, the authors observe.  
 
Overall, 69% of plans offer auto escalation, up from 50% from DCIIA’s prior survey. Not surprisingly, larger plans (76%) are more likely to offer auto escalation than smaller plans (55%). In addition, 6 in 10 plan sponsors report that they offer auto escalation as a default option in conjunction with auto enrollment. The remaining third report that it is not a default option for their plans and must be elected by participants, the study notes. 
 
More than 8 in 10 plan sponsors have set a default deferral rate increase of 1%. The study notes that this choice was driven by concerns related to what participants will find palatable, a perceived reasonableness from a fiduciary standpoint, consultant recommendations and it being the most common practice among plans. 
 
As for reaching a saturation point, the study finds that only 7% of plans that don’t offer auto escalation today say they are “very likely” to offer it in the next 12 months; only 5% say they are “somewhat likely.” The two most often-cited reasons for not offering escalation are concerns that it’s too paternalistic and not having studied it carefully enough. 
 
QDIA Re-enrollment 
 
An area of potential future growth could be in the adoption of QDIA re-enrollment, which remains limited. While this year’s survey shows a modest increase—with 24% reporting having ever done a QDIA re-enrollment up from 18%—the authors note that periodic sweeps are used only by about 20% of plan sponsors, indicating it is “viewed as a tactical remedy rather than as a strategic tool.” The most common reasons for not conducting a QDIA re-enrollment include: 
 
  • satisfaction with participants’ current asset allocation; 
  • they are considering it in the future; and 
  • a perceived lack of benefits combined with a perceived risk. 
Benefits and Opportunities
 
All in all, while the findings suggest that auto-features may have plateaued, the authors emphasize that two-thirds of plans offering auto features see a “direct and attributable benefit” to their plans’ outcomes. The most commonly cited benefits, according to the findings, are higher participation, followed by faster growth of plan assets, which can lead to reduced costs. “In short, plan sponsors are adopting auto-feature practices because they recognize that they are working,” the authors write. 
 
When respondents were asked about the next big opportunity related to auto features, plan sponsors offered several possibilities: 
 
  • Addressing longevity risk with auto features (buying annuities) 
  • Increasing escalation amount and/or removing the escalation cap 
  • Auto after-tax in-plan Roth conversions 
  • Increasing contribution percentage for auto enrollment 
  • Dynamic QDIA or defaulting into a retirement tier 
  • Re-enrolling opt-outs on a regular basis 
  • Automated payout options 
  • Auto-rebalancing
  • Retirement-income calculations 
  • Auto rewards, such as extra company contribution or lower fees for not taking loans or early distributions
The survey, conducted by DCIIA’s Retirement Research Center (RRC), represents the views of 175 DC plan sponsors and is based on year-end 2018 data (57% of respondents represent plans with assets greater than $200 million, while 43% represent plans with less than $200).