The good news: Automatic enrollment continues to expand engagement
This year’s research continued to highlight that effective plan design can have a powerful impact on participant behaviors. Nowhere is this clearer than with automatic enrollment programs.
Past Ready! Fire! Aim? findings have consistently shown that contribution rates, on average, started too low for younger participants and increased much too slowly throughout their working careers to ensure adequate retirement funding—and these trends have gotten steadily worse over the years. With this current update, we were able to take a deeper dive into contribution patterns to evaluate how behaviors differed among three participant segments:
- passive participants, who were automatically enrolled in their plans and never made contribution changes beyond their initial default rates
- subsequent shifters, who were automatically enrolled but had a later rate change (either through automatic contribution escalation or by making a change on their own)
- active engagers, who both enrolled in their plans and set their contribution rates on their own
Approximately 62% of the plans in our study, which covered roughly 80% of the participants, utilized automatic enrollment as a way to increase participant engagement.1 Given this broad adoption, it was unsurprising to see that more than 51% of 25-year-old participants investing in a plan were initially enrolled through an automatic enrollment default, potentially engaging participants who might not have invested in the plan otherwise. This percentage drifted lower to 36% for 45-year-old participants and to 27% for 65-year-old participants, since the bulk of many companies’ new hires (i.e., the employees most likely to have been automatically enrolled) tend to be in their earlier working years.
This large percentage of younger defaulted participants suggests that plan sponsors can have an extremely positive influence by setting employees on a constructive retirement savings path while also getting them to start investing for retirement early in their careers. These participants are also typically automatically invested in qualified default investment alternatives (QDIAs), usually professionally managed target date funds, which research has shown often deliver stronger investment results for the average investor than if that investor had selected his or her own asset allocation.
The bad news: Automatic enrollment is also weighing on lower contribution rate trends
Unfortunately, the average contribution rate for passive participants fell significantly below those of subsequent shifters and active engagers. On average, contribution rates for:
- passive participants started at a 3.3% average contribution rate at age 25 and stayed at that level across all working years
- subsequent shifters started at a 5.7% average contribution rate at age 25 and increased slowly, reaching 6.9% at age 45 and 8.2% at age 65
- active engagers started at a 5.5% average contribution rate and increased even more slowly, reaching 6.3% of salary at age 45 and 7.7% at age 65
This means that a sizable segment of participants is starting average contributions at a minimal 3.3% rate and failing to take any action other than what the plan sponsor makes on their behalf in terms of subsequent increases. Moreover, these contributions are anchored at a level notably below the savings rate of at least 10% recommended by many industry experts.
On the plus side, subsequent shifters changed their contribution rates, on average, at the highest percentage amounts across all three groups, a trend that continued as the segment grew older. There also seemed to be a strong correlation between participant salary increases and positive contribution rate changes, particularly in the earlier career years.
Key finding: Automatic enrollment weighing on contribution rates
EXHIBIT 1: AVERAGE CONTRIBUTION RATES BY ENROLLMENT TYPE
We have a number of security protocols in place which ensure all customer data are kept confidential and secure. We use reasonable physical, electronic, and procedural safeguards that are designed to comply with federal standards to protect and limit access to personal information. There are several key controls and policies in place to ensure customer data are safe, secure and anonymous:
- Before J.P. Morgan Asset Management receives the data, all unique identifiable information, including names, account numbers, addresses, dates of birth and Social Security numbers, is removed.
- J.P. Morgan Asset Management has put privacy protocols for its researchers in place. Researchers are obligated to use the data solely for approved research and are obligated not to re-identify any individual represented in the data.
- J.P. Morgan Asset Management does not allow the publication of any information about an individual or entity. Any data point included in any publication based on customer data may only reflect aggregate information.
- The data are stored on a secure server and can be accessed only under strict security procedures. Researchers are not permitted to export the data outside of J.P. Morgan Chase’s systems. The system complies with all J.P. Morgan Chase Information Technology Risk Management requirements for the monitoring and security of data.
- J.P. Morgan Asset Management provides valuable insights to policymakers, businesses and financial advisors, but these insights cannot come at the expense of consumer privacy. We take every precaution to ensure the confidence and security of our account holders’ private information.
TARGET DATE FUNDS. Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.