Higher 401(k) Deferral Rates Create Engaged Participants, New York Life Finds

Plans that auto enroll participants at a rate greater than 3% of salary have a 95% overall participation rate

In a recent study of its retirement clients, New York Life Retirement Plan Services found higher default deferral rates in 401(k) plans with auto enrollment lead to higher participant retention and proactive asset allocation selection. 

According to the company, this counters “the auto-enrollment myth that higher auto-deferral rates result in participants opting out of plans in larger numbers.”

The New York Life analysis indicates that plans auto enrolling their participants at higher deferral rates have lower participant opt-out rates. Plans implementing auto enrollment with a default deferral rate of greater than 3% have consistently experienced lower opt-out rates than plans with lower default rates, year over year. Plans with less than 4% default rates experienced 14% opt-out rates, versus 10% for plans with greater than 3% default deferrals.

The study also shows plans that auto-enroll participants at a rate greater than 3% of salary have a 95% overall participation rate—superior to auto-enrollment plans with less than a 3% deferral rate, which have 88% participation on average.

According to the study, 30% of participants in plans with default deferral rates higher than 3% proactively increased their deferral rate within a year of being auto-enrolled. That percentage has steadily increased since 2006, when only 13% of the population had done so. 

By comparison, the percentage of those enrolled at lower rates have raised their contributions has varied between 27% and 26% over the same time period.

The analysis involved 480 plans and 800,000 participants across New York Life’s retirement platform. Auto-enrollment in 401(k) plans was encouraged in the Pension Protection Act of 2006. The number of plans on the New York Life platform that have adopted auto-enrollment climbed to 61% as of March 31, compared with 21% in 2006.

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