Auto Features Succeeding, Study Says

Much has been said and written about retirement readiness, and auto features—enrollment and escalation—are widely considered a way to improve it. A recent study has added to the statistics that bolster that view.

 

Auto features can improve retirement readiness by more than 15 percentage points, says John Hancock in its white paper “State of the Participant 2020: Readiness Within Reach.” And its effects are increased the higher the deferral rate and its annual increase are, the study adds.

John Hancock found that with no auto features at all, just under half of employees will be financially ready for retirement; with their introduction it can rise above 60%.

 

 

Feature	% of Employees Ready for Retirement
No Auto Features	47.9%
Auto Enrollment with 4% Deferral	56.2%
Auto Enrollment, 4% Deferral, 1% Annual Auto Increase	57.3%
Auto Enrollment with 6% Deferral	60.2%
Auto Enrollment, 6% Deferral, 1% Annual Auto Increase	63.0%

 

 

John Hancock also found that that for plans with auto features that allow employees to opt out, the percentage of employees who exercise that option generally decreases in inverse proportion to an increase in the default contribution rate.

 

 

Default Contribution Rate	Auto-Enrollment Opt-Out Rate
1%	12.9%
2%	15.0%
3%	12.0%
4%	9.4%
5%	10.1%
6%	10.4%
7%	4.6%

 

 

The study further found that increasing the contribution rate does not make plan participants more reluctant to save. In fact, John Hancock reports that it found that the opt out rate was the lowest at the highest default rates. They add that the most common default rate was 3%, but that there has been a “significant” shift to default rates higher than that in the last four years.