Data and Research December 29, 2021

Increasing DC Plan Default Deferral Rates a Better Driver of Higher Savings

New research evaluates whether a higher default savings rate or a higher match has a greater impact on retirement savings outcomes.  

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A new research paper suggests that defined contribution (DC) plan sponsors should focus on increasing the default savings rate to help boost participants’ retirement savings for new employees rather than increasing employer matching contributions.

Researchers David Blanchett, from QMA; Michael S. Finke, from the American College; and Zhikun Liu, from Empower Retirement, examined the interaction between employer match thresholds and default savings rates to understand how each may affect how much lower-income employees save for retirement and which employees receive a greater share of employer contributions. Selecting a higher default rate has the largest impact on employee savings rates for new employees, according to the research paper, “The Impact of Employer Defaults and Match Rates on Retirement Savings,” published by the Social Science Research Network (SSRN).

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“Implementing a default rate that is greater than the match rate results in a savings rate that is 0.64 percentage points higher, and selecting a low default rate and a higher match rate results in a predicted savings rate 0.19 percentage points lower,” the paper states.

Defined contribution (DC) plan sponsors set the two parameters that influence employee savings rates: the default savings rate and the percentage of an employee’s DC contribution matched by the employer.

Higher employer matches can encourage greater savings but is likelier to benefit higher-earning cohorts, the research shows.

Plan sponsors have used employer matching contributions to spur an increase in participant savings, but research shows that millions of American workers are not contributing enough to the workplace retirement plan to benefit from the full company match.

“A generous employer match motivates individuals who have greater financial literacy or a higher optimal savings rate but may result in a regressive distribution of employer retirement contributions,” the paper states.

Plans with low default rates that match a high percentage of employee earnings induce higher income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees, according to the paper.  

However, the research found that when employees are defaulted in at a higher rate, fewer move away from the default savings rate, which results in higher and more equal savings rates among employees at all income levels. In addition, the researchers note that lower-income workers can benefit from remaining in the default plan investment by taking advantage of institutionally priced diversified funds.

After lawmakers passed the Pension Protection Act in 2006, employers using auto-enrollment in their DC plans often used a 3% default deferral rate. However, prior research has shown that increasing the default deferral rate does not deter employees from participating in the plan.

According to the 2021 PLANSPONSOR Defined Contribution Survey the percentage of DC plans with a default deferral rate greater than 3% had reached 51%, with one-quarter defaulting participants at a rate of 6% or greater.

Data and Research December 28, 2021

Long-Term Care Policy Holders Drew Record Benefits This Year

The more than $12 billion paid represents an increase of $2 billion over the total claim benefits drawn in 2018.

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The nation’s long-term care insurers paid out $12.3 billion in claims during 2021, representing a significant increase over prior years, according to the American Association for Long-Term Care Insurance (AALTCI).

As pointed out by Jesse Slome, AALTCI director, the amount of claimed benefits paid to policyholders grew by approximately $700 million compared to the 2020 payout. According to the association’s annual report of claims paid, the $12.3 billion paid represents an increase of $2 billion over the total claim benefits paid by the industry in 2018.

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“Claim benefits were paid to some 336,000 policyholders,” Slome says. “Some claims amount to small amounts and some can be significant, totaling over $1 million.”

Partly explaining the growth in payments is the fact that the number of individuals paid during 2021 grew by roughly 11,000 compared to the prior year.

“Even if you do a simple calculation, the average claim amount paid out for the year would equal $36,600. And claims can last for several years,” Slome adds. 

The amount reported represents claims for those owning traditional or health-based long-term care insurance. The association report does not include data for those who have purchased a linked-benefit policy. These include life insurance or annuity policies that can also provide payouts for qualifying long-term care needs.

According to data provided by Genworth’s U.S. life insurance division, fewer than 10% of those who will likely need long-term care insurance own a policy. Related data from Northwestern Mutual suggests seven out of 10 people over the age of 60 will face a long-term care event.

What typically prompts a person to decide to inquire about or purchase long-term care insurance is having experienced the need for such care in their own family, according to Northwestern Mutual. Or, perhaps, they are facing a medical issue of their own.

A HealthView Services analysis reveals that an average, healthy 65-year-old male/female couple has a 75% chance of at least one spouse requiring some form of long-term care if each live to their actuarial life expectancies. “Regardless of the type of care required, those who fail to plan for long-term care may face substantial medical bills with few means to pay other than by liquidating assets,” it says.

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