Improving the Automatic Plan Design

“Getting Beyond Ordinary: Advances in Automatic Savings Program Design,” by T. Rowe Price, notes that using relatively low automatic deferral rates, offering automatic enrollment only to newly eligible employees and offering automatic deferral increase on an opt-in basis has hindered the results of automatic plan features. The paper suggests using a higher default deferral rate, auto-enrollment for existing eligible employees not currently deferring, automatically increasing deferral rates with participants able to opt-out and automatically investing certain employees in a qualified default investment alternative (QDIA).  

T. Rowe Price notes that among its own clients, of the participants defaulted into a QDIA, 96.3% remained in the default option, and when automatic increase was offered on an opt-in basis, only 8.3% of participants chose to opt in, versus 64.7% staying in when auto increase was offered on an opt-out basis.   

The paper suggests a default deferral rate at which participants are automatically maximizing their employer match contribution at the point of enrollment. In addition, an enhanced program would automatically enroll all eligible employees, not just new hires. An even more advanced program would implement this automatic re-enrollment periodically.  

T. Rowe Price also suggests an enhanced program would reset formerly defaulted investors into a QDIA, reset improperly diversified portfolios into a QDIA and reset unengaged participants into a QDIA. An advanced program would periodically reset improperly diversified portfolios to a QDIA.  

The report also discusses monitoring plan success and fiduciary considerations for automatic features.