TIAA Study Finds Automatic Enrollment in 401(k) Plans Boosts Employee Participation
Revamped TIAA retirement program increased 401(k) employee participation to 95%
New York, November 22, 2011 - Today, the TIAA Institute released a case study on the redesign of the TIAA family of companies’ retirement program and the dramatic impact the new design has had on employee participation in the 401(k) plan. The retirement program was redesigned in accordance with the Retirement 21 initiative -- a set of principles TIAA developed and has been advocating to meet the retirement income needs of a 21st century workforce. TIAA’s retirement program includes two defined contribution retirement plans; TIAA’s primary defined contribution plan as well as a 401(k) plan. Additionally, the program also includes a Retirement Healthcare Savings Plan (RHSP).
A key feature of the redesign was auto-enrollment of employees in the 401(k) retirement plan. The use of auto-enrollment increased employee participation from 63% to 95%. Prior to January 1, 2011, 53% of TIAA employees were deferring at least 3% of salary into the 401(k) plan and another 10% were deferring between 1% and 3%. After auto-enrollment became effective, the participation rate increased to 95% with an average deferral of 7%.
“Our priority with the redesign was to offer an innovative plan that strikes a balance between employer and employee responsibility for ensuring an adequate and secure income through retirement,” said Dermot O’Brien, executive vice president of Human Resources at TIAA. “We are delighted we were able to boost our employee participation rate in the TIAA 401(k) plan so dramatically and believe the redesign of the whole retirement program will be instrumental in providing our employees a secure and safe retirement.”
“Our study clearly shows that one of the primary tenets of a well-designed defined contribution plan is auto-enrollment,” said Paul Yakoboski, principle research fellow at the TIAA Institute and one of the report’s authors. “Most individuals intend to save for retirement, but many fail to act upon their intentions for various reasons. By simply making participation automatic, as opposed to leaving it to the participant to enroll, we were not only able to maximize employee participation, but also increase savings levels.”
The revised program is designed to encourage greater employee savings for retirement by redirecting a portion of company non-discretionary retirement contributions into matching contributions. Specific changes to TIAA’s retirement program included:
- Auto-enrollment of employees in the 401(k) plan at a 3% contribution rate – giving workers the choice of opting out of the plan, as opposed to the traditional choice of opting in.
- Institution of 100% employer match in the 401(k) plan on the first 3% of salary contributed by an employee.
- Employees now participate in the redesigned primary DC plan immediately upon start of employment; previously there had been a six-month waiting period.
- Addition of a matching contribution to the retirement healthcare saving plan.
- More flexible deferral and savings options, including introduction of a Roth 401(k) option.
- Use of a proactive educational program encouraging every employee to receive retirement planning advice and counseling services.
TIAA considers it best practice for retirement programs to target an income replacement rate of at least 70% from all sources, including Social Security. This requires total contribution rates, including both employer and employee contributions, in the 10-14% range depending upon assumed investment returns and time horizon to retirement. By fully leveraging the employer match under the redesigned structure, total contributions to employee retirement plans would range from 11% for an employee in his or her twenties to 18.5% for an employee age 55 and older.
The Retirement 21 principles were derived from the belief that the overriding objective of an employer-sponsored retirement plan should be to provide an adequate and secure source of income throughout retirement to plan participants. The principles include:
- Building sufficient savings
- Helping workers manage risk
- Providing advice and education services
- Covering core living expenses in retirement via a lifetime annuity
- Encouraging savings for health-related expenses in retirement
A copy of the full case study is available for download here.
TIAA (www.tiaa.org) is a national financial services organization with $440 billion in combined assets under management (as of 9/30/11), and is the leading provider of retirement services in the academic, research, medical and cultural fields.
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John McCool, TIAA
Ken Luck, TIAA