Employees may have been automatically enrolled at too low a level, or may want to adjust their investment mix. Image: peterschreiber.media/Shutterstock.com
Employer-sponsored retirement savings plans that have new employees invest some of their pay by default increase the percentages of those who save through such plans but also can have “unintended consequences,” says a Congressional Research Service Report.
The report focused on 401(k)-type programs in general and not specifically on the Thrift Savings Plan, which like some of those plans has a default investment feature for newly hired federal employees.
It said that those features do increase the percentage of employees investing their own money, saying that among private sector plans managed Vanguard, 93 percent of employees invest in plans with that feature vs. 7 percent for plans without it. The TSP’s experience has been largely the same, with the percentage of employees under FERS who invest their own money rising from about 85 percent before the TSP adopted that feature in 2010, to about 95 percent today.
Also, it said that in private sector plans with automatic enrollment, “participants are likely to save at or near the default contribution rate.” That also is the case with the TSP, where the default rate is 5 percent of salary, enough to capture the maximum possible government contribution (it was 3 percent from 2010-2020); while employees can increase that rate at any time, many never do.
However, the report noted that staying at the default rate, “some participants may contribute at a lower level than if they had voluntarily enrolled. Some researchers have found evidence of relatively lower contribution rates among automatically enrolled participants.” That is the case for example with plans managed by T. Rowe Price, it said, where average investment rates are 3 percentage points lower for plans with automatic investment.
“For example, some employees automatically enrolled at a 3% deferral rate might perceive 3% as an adequate savings rate and choose not to change their contributions. If they had enrolled themselves in the plans and chosen contribution rates on their own, some might have selected higher rates, such as 4%,” it said.
That also is consistent with the experience of the TSP, which reported last year that the average investment rate is 8.9 percent of salary—above the private sector average of just above 7 percent but below the 9.5 percent figure in the years before default investment began.
Further, the report said, some research indicates that employees with default investment accounts tend to take out more loans and in-service withdrawals, sapping the value of those accounts, and are more likely to abandon those accounts on leaving an employer because they “are more likely to lose track” of them.
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See also,
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