The Use Of Automatic Plan Features Continues To Rise

8/25/16 8:00 AM

iStock_000013512481_Small-1-1.jpgThe main goal of the Pension Protection Act of 2006 (PPA) was to shore up the finances of the federally guaranteed pension insurance fund. However, this legislation also brought with it several beneficial changes in how 401(k)s operate, both for plan sponsors and participants. For example, the PPA provided fiduciary cover for plans using certain automatic features, in turn making it easier for more employers to automatically enroll workers into 401(k) plans at a default savings contribution rate, as well as to escalate those contribution rates automatically on a periodic basis. Recent data show that the use of these plan features has jumped since the law’s enactment.


A report from Vanguard, for instance, showed that 41 percent of Vanguard plans had adopted automatic enrollment in 2015, up from just 10 percent of plans in 2006. Of those plans, 70 percent featured automatic contribution increases on an annual basis, and 63 percent of new Vanguard participants last year were hired under automatic enrollment (versus 12 percent in 2006). The PPA also sanctioned the use of target-date funds (TDFs) as a qualified default investment alternative (QDIA), and TDF use has nearly doubled since the passage of this legislation, according to the report. Further, 90 percent of Vanguard plan sponsors offered TDFs at yearend 2015, and 70 percent of eligible participants took advantage of these lifecycle offerings.


A similar study released this month by T. Rowe Price showed that roughly half (51 percent) of the plans it administered at the end of 2015 had adopted an auto-enrollment feature, a 28 percent increase in just the past five years. The benefit of automatic enrollment can be clearly seen among younger workers because the participation rates in 2015 for employees in the under-20 and 20-to-29 age groups were 76 percent and 84 percent, respectively, compared to just 3 percent and 30 percent, respectively, for those who were not auto-enrolled. Further, nearly a third (30%) of all plans auto-enrolled participants at an initial contribution rate of 6 percent or greater, compared with just 17 percent in 2011 and therefore an encouraging sign that more sponsors are starting to move away from the traditional (low) 3 percent default rate. 



Sources: WSJ, Wikipedia, P&I Online, Vanguard, T. Rowe Price

Post author: Charles Couch