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New Data from The Principal Shows Impact of Automatic Enrollment in 401(k) Plans

May 17, 2011 (Des Moines, IA) - The design of automatic enrollment features in 401(k) retirement plans can help drive better savings behavior without significantly affecting participation numbers, according to new analysis from the Principal Financial Group®.

“Automatic enrollment is a powerful tool to encourage better retirement savings behavior, but we’ve found that most plan sponsors tend to set their default at what we believe is an insufficient level,” said Barrie Christman, vice president of individual investor services at The Principal®. “By boosting the default rate, plans sponsors can help their participants improve savings rates without sacrificing participation.”

Client data from The Principal shows that plans with an automatic enrollment feature defaulting at 3 percent[1] produce an average deferral of 6.3 percent. This is lower than the average deferral of 6.8 percent for plans without an automatic enrollment feature[2]. In contrast, the average deferral is 7.1 percent for plans that have a 6 percent default automatic enrollment feature[3].

Most participants automatically enrolled in their plan sponsor’s retirement plans either accepted the default rate or chose to defer even higher, even as the default rate increased from 3 percent to 6 percent. In fact, at a 3 percent default rate, twice as many participants chose to defer more (36 percent) rather than opt out completely (15 percent) or at a rate lower than the default (3 percent).

The following tables compare participant deferral rates at a 3 percent default and a 6 percent default:

3% Default Rate

Deferral Rate % of Total Participants[4] Avg. Deferral %
Opted out at 0% 15% 0.0%
Deferring at >0% to <3% 3% 1.5%
Deferring at default of 3% 45% 3.0%
Deferring at >3% 36% 6.7%

6% Default Rate

Deferral Rate % of Total Participants[5] Avg. Deferral %
Opted out at 0% 19% 0.0%
Deferring at >0% to <6% 14% 2.9%
Deferring at default of 6% 49% 6.0%
Deferring at >6% 18% 11.8%

Participation rates

Automatic enrollment significantly boosted participation in retirement plans. The data reveals a 20 percent increase in participation in plans with an automatic-enrollment feature[6] compared to participation in plans without the feature[7].

Further, automatic enrollment at 6 percent increased opt outs by just 4 percentage points (19 percent) over the 3 percent automatic-enrollment deferral rate (15 percent).

Savings rates with employer match

Client data indicates that combining automatic enrollment with an employer matching contribution helps drive an even better savings rate. The tables below show the savings rates of participants who are both automatically enrolled and receive a stated employer match:

3% Default Rate

Savings Rate with Deferral and Match % of Total Participants[8]
<3% 4%
3 – 5.99% 19%
6 – 10.99% 45%
11+% 32%

6% Default Rate

Savings Rate with Deferral and Match % of Total Participants[9]
<3% 2%
3 – 5.99% 5%
6 – 10.99% 31%
11+% 61%

Nearly twice as many participants (61 percent) reach an overall savings rate greater than 11 percent when their employers’ plan defaulted them at 6 percent rather than 3 percent (32 percent). Twenty-eight percent of participants in plans with a stated employer match but without automatic enrollment[10] save 11 percent or more.

“In order to generate sufficient retirement income, we believe most retirement plan participants should be saving 11-15 percent of their pay—including employer match—throughout an entire working career,” Christman said. “It’s clear that participants who are automatically enrolled at a higher level are more likely to hit that all-important savings range.”

Christman added that implementing an auto-escalate program, which automatically increases participants’ deferral amounts by certain percentages over set amounts of time, along with automatic enrollment is another way for plan sponsors to help participants reach their retirement savings goals. “Our data supports coupling the two programs to achieve the most successful plan design, especially if the automatic enrollment default rate is lower,” she said.

For more news and insights from The Principal, connect with us on Twitter at http://twitter.com/ThePrincipal.

About the Principal Financial Group

The Principal Financial Group® (The Principal ®)[11] is a retirement and global asset management leader. The Principal offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, investment services and insurance through its diverse family of financial services companies. A member of the FORTUNE 500®, the Principal Financial Group has $327.4 billion in assets under management[12] and serves some 16.4 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG.

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[1]
Data based on group of 1,145 retirement plans that offer automatic enrollment at a 3 percent default rate (as of 12/31/10).
[2]
Data based on group of 21,397 retirement plans that do not offer automatic enrollment (as of 12/31/10).
[3]
Data based on group of 203 retirement plans that offer automatic enrollment at a 6 percent default rate (as of 12/31/10).
[4]
Data based on group of 115,728 participants in active auto-enroll contracts with a default deferral percentage of 3 percent (as of 12/31/10).
[5]
Data based on group of 7,293 participants in active auto-enroll contracts with a default deferral percentage of 6 percent (as of 12/31/10).
[6]
Data based on group of 2,642 retirement plans that offer automatic enrollment (as of 12/31/10).
[7]
Data based on group of 21,397 retirement plans that do not offer automatic enrollment (as of 12/31/10).
[8]
Data based on group of 23,171participants with a stated employer match and in active auto-enroll contracts with a default deferral percentage of 3 percent (as of 12/31/10).
[9]
Data based on group of 2,579 participants with a stated employer match and in active auto-enroll contracts with a default deferral percentage of 6 percent (as of 12/31/10).
[10]
Data based on group of 44,782 participants (as of 12/31/10).
[11]
“The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.
[12]
As of March 31, 2011.

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