DC Plan Sponsors: It’s Good to Be Better by Richard Davies, AllianceBernstein
What’s the real point of having a defined contribution (DC) plan in the first place? That’s the big question US plan sponsors needs to ask themselves. If the answer is helping employees achieve better retirement outcomes, then the DC plan can’t just be good: it’s got to be better.
More than any other success metric, DC plan sponsors want to have employees feel confident about their prospects for a comfortable retirement. That’s what over 1,000 US plan sponsors told us in our most recent survey (a balanced representation from across the full universe of DC plan sizes) fielded in 2014.
But how can you make that happen? That nagging problem has not been resolved by participant education, more investment options or even better investment choices. All of those may be good to have, but too many employees aren’t well diversified, aren’t contributing enough or aren’t in the plan at all.
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The answer frequently lies with implementing automatic features: automatic enrollment in the plan and automatic escalation of participants’ contribution rates.
And many plan sponsors have arrived at that conclusion already. Overall, 55% of our respondents use automatic enrollment. This is similar to AonHewitt’s survey that found the percentage of plans offering automatic enrollment has risen from 34% in 2007 to 59% now (“2013 Trends & Experience in Defined Contribution Plans,” AonHewitt, 2013).
Automatic enrollment boosts participation—plain and simple. But it’s interesting to see how much of a difference it makes: two-thirds of plans that use automatic enrollment have participation rates above 70%, while just under half of plans that don’t use it have that level of enrollment (Display).<