There’s no question that auto-enrollment helps participants save for retirement through their workplace plans. That’s great news. The bad news is that many participants simply aren’t saving enough. That’s why we are championing a change in public policy to help ensure that participants are on their way to retiring with dignity rather than anxiety.

Here’s the truth: The 3% default deferral rate used in nearly half of auto-enrollment plans is too low. Researchers have noted for years that low default rates act like an anchor. To save more, participants must take action — and many don’t. The numbers tell the story. Average savings rates are 7.9% in plans without auto-enrollment, but just 6.6% in plans with auto-enrollment.
Fortunately, a growing number of employers are eschewing the traditional 3% default deferral rate in favor of rates of 6%, 8% or even 10%, and are using auto-escalation to boost participants’ savings rates to as high as 20% over time.

Studies show that people who save at those levels are much more likely to accumulate enough money to last throughout retirement.[1] What’s more, many employers are finding that participants are willing to go along with higher default deferral rates.

Public policymakers need to be “fast followers” behind these leading-edge employers and provide guidance that sets an initial default percentage of 10%, with the escalation cap at a minimum of 20% of compensation. If these changes are made, workers will thank their employers and the government for adequately preparing them for a dignified retirement.

If current efforts to expand DC plan coverage are successful, new default deferral rules may help millions of new savers get their retirement savings off on the right foot.

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Melissa Kahn

Melissa Kahn

Kahn is managing director for the defined contribution team at State Street Global Advisors.