Public Sector Employees Favor Default Investment Offerings

Public sector employees overwhelmingly accept default investment options in their defined contribution retirement plans, with more than 80% of participants across all age groups opting to remain in the default selection, a new study from MissionSquare Research Institute found.

This emphasizes the importance of plan sponsors selecting well-designed default options for securing retirement outcomes, according to the report. 

“Default Investment Acceptance Among Public Defined Contribution Plan Participants” examined how demographic and economic factors influence investment decisions. 

When plan sponsors automatically enroll employees in a DC retirement plan, they are placed into a predetermined investment lineup, typically a target-date fund or a stable value fund. While some participants choose to customize their investment allocations, the majority stick with their default selection for years. 

Acceptance of default investments declines with age and income, according to the report. Younger, lower-income participants exhibit the highest acceptance rates, with 97% of new enrollees in these demographics sticking with default options. In contrast, older, higher-income participants have the lowest acceptance rate: 69%. 

Female participants are more likely to accept default investments than male participants, with the most significant differences occurring at higher income levels. The study also found that economic downturns influence default investment decisions, particularly among older participants.  

During the volatility caused by the COVID-19 pandemic in 2020, default investment acceptance rates among those aged 60 to 70 dropped to about 50% from nearly 90%, while younger participants’ investment choices remained stable. 

Public sector employees who initially accept default investments rarely change their allocation, with an opt-out rate of only 1% per year. However, opt-outs are more frequent among older and higher-income participants. 

The study emphasized the need for public sector retirement plan administrators and advisers to carefully design default investment options to support long-term retirement security. 

“Since public sector DC plan participants are more likely to accept and stay within default investments, plan administrators and advisers should take more responsibility/actions for designing default options that would better facilitate participants making appropriate saving and retirement planning decisions,” the report stated.  

Moreover, MissionSquare’s analysis suggested that strategies to encourage participants, especially those who initially opted out, to periodically reassess their default investments could help optimize retirement outcomes. 

The study examined data from approximately 340,000 newly enrolled public sector DC plan participants between 2020 and 2023, primarily focusing on those using target-date funds as default investments, with some plans incorporating stable value funds.