Summary
The Employee Retirement Income Security Act of 1974 (ERISA) governs the provision of employee benefit plans in the private sector, including pension benefits from both defined benefit (DB) and defined contribution (DC) plans. ERISA preempts state laws from regulating employee benefit plans, which allows employers to be creative in their provision of the benefits and offers opportunities to enhance them. A prime example of this is automatic enrollment, where DC plan participants are automatically enrolled in the plan once they’re eligible and must opt out if they do not want to participate, which has led to increased participation rates. Other automatic features have also been adopted by plans, showing the importance of plan design in improving participants’ outcomes.
This study examines the impact of each of these automatic features using EBRI’s Retirement Security Projection Model® (RSPM). RSPM has been used to evaluate various retirement policy proposals and legislation since its use for the first national evaluation of the retirement system in 2003. Building on this prior work, the impact of these automatic features is shown for each individual provision as well as for measures used collectively in helping to increase the likelihood of individuals not running short of money in retirement.
- When automatic enrollment with a 6 percent default contribution is adopted by all DC plans, the retirement savings shortfall among those who have access to a DC plan in the future decreases by 7 percent. This increases to over 10 percent for those ages 35–39.
- When automatic escalation is added to the automatic enrollment plans with a 6 percent default contribution rate, the reduction in the retirement savings shortfall increases to 9 percent.
- When automatic portability alone is used by all plans, the reduction in the retirement savings shortfall reaches over 11 percent for those ages 35–39.
- When automatic enrollment with a default contribution rate of 6 percent, automatic escalation, and automatic portability are adopted by all, the likelihood of not running short of money for those with future access to a DC plan increases by nearly 5 percentage points, and the reduction in the retirement savings shortfall is 16 percent. For those ages 35–39, the likelihood of not running short of money increases by almost 9 percentage points, and the retirement savings shortfall is reduced by 26 percent.
- The impact of automatic features is the largest among those who will have more years exposed to them — those younger and with more future years of eligibility in a DC plan. In fact, for those with 27–30 years of future eligibility in a DC plan, the retirement savings shortfall decreases by 60 percent.
Plan sponsors and policymakers need to understand the impact of automatic features, as the amount workers contribute to a DC plan and the likelihood of asset preservation can be increased by better plan design through the use of these features. The benefits of automatic features are particularly important for individuals who have lower incomes or who have been traditionally less likely to participate in a plan, so all participants can have better outcomes from their participation in a plan.