While defined contribution plan design features such as auto-enrolment and auto-escalation aim to combat plan members’ poor behavioural tendencies, they could be leading to certain unintended consequences, according to a new report by BlackRock Inc.
For example, if a plan is using both auto-enrolment and auto-escalation tools, there’s a chance that more members could opt out of additional savings, unless the proper balance is struck, noted the report. While it acknowledged the effectiveness of auto-enrolment, it also said default rates are widely understood to be well below what members should ideally be saving. And auto-escalation tools remain much less popular, which the report noted could be due to the worry that members may opt out entirely if the escalating rates are too high.
The report laid out these concerns in a case study, showing a significant number of participants remained in a plan with auto-default and auto-escalation rates, rather than opting out. Indeed, participation was so good, rates could have been even higher, suggested the report. Further, participants who demonstrated a more active attitude towards their plans opted to contribute beyond the auto-escalation cap of six per cent, while more passive members accepted the default rate of four per cent and the escalation cap. Among active participants, 33 per cent remained within the four to six per cent deferral range, while 43 per cent went above. More passive participants, 60 per cent remained between four and six per cent, while 19 per cent exceeded it.
These two groups’ behaviour could be an argument for higher caps, the report suggested. While passive participants in the case study remained firmly anchored to the rates dictated by the employer, the savings appetite of the more active group could indicate that higher rates and caps could push the more passive group into saving more. As well, the report suggested that setting rates too low could undermine the mechanism of auto-enrolment and auto-escalation tools to the point of actually preventing members from saving more than they otherwise may have.