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Automatic Enrollment Research: Maximizing Retirement Savings Potential

Explore the impact of automatic enrollment on retirement savings in comparison to voluntary plans, and uncover the demographic effects and implications for improving savings outcomes. Research conducted by Steve Utkus at Vanguard Center for Retirement Research in May 2008. Website: www.vanguard.com/retirementresearch

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Automatic Enrollment Research: Maximizing Retirement Savings Potential

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  1. Recent automatic enrollment research Steve Utkus Vanguard Center for Retirement Research May 2008 www.vanguard.com/retirementresearch

  2. Two-part research agenda Effectiveness research • 50 plans (covering 120,000 eligible employees) adopting AE over 2000-2006 period, compared with over 500 plans with voluntary enrollment • Overwhelmingly AE for new hires only • 90%+ plans with initial contribution of 2-4%. Half with auto-escalate feature. • www.vanguard.com/retirementresearch. With Nessmith and Young at Vanguard. Literacy and trust research • Three employer plans with voluntary or automatic enrollment covering 9,500 new hires • Within this group, over 800 participated in survey on literacy and trust • With Agnew and Szykman at William and Mary. Paper at http://crr.bc.edu/

  3. Automatic enrollment – high-level benefits Participation rates Default investments (contributions) Source: Vanguard, 2007.

  4. Automatic enrollment – savings tradeoff Participant contribution rates Employee contribution rates Source: Vanguard, 2007.

  5. Automatic enrollment – demographic effects Participation rates by select demographic variables Source: Vanguard, 2007.

  6. Research results – voluntary enrollment plans Marginal effects on participation rates Source: Vanguard, 2007. * Not statistically significant.

  7. Research results – automatic enrollment plans Marginal effects on participation rates Source: Vanguard, 2007. * Not statistically significant.

  8. Implications • Opt-out savings regimes do improve savings outcomes dramatically, in keeping with default or framing effects. • These effects are strongest for groups who are traditionally associated with low rates of saving—especially young and low-wage workers. Yet the effects also appear among older and high-wage workers. • Both financial illiteracy and mistrust play a crucial role in raising quit rates under automatic enrollment. • Despite success of automatic enrollment, two issues remain: • Inadequacy of total contributions. 40% of plans have total savings < 9% • The problem of “quitters”

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