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4 Myths About Automatic Enrollment

A recent report by the Defined Contribution Institutional Investment Association (DCIIA) highlights four myths about automatic enrollment.

Myth 1: A 3% default is common, so it must be good.

DCIIA notes that the default contribution rate of 3% under automatic enrollment gained popularity early on (and it was incorporated in the Pension Protection Act’s automatic enrollment safe harbor), which has made it a prevalent, but not a particularly robust, way of implementing automatic enrollment. Oh, and it likely won’t be “enough” — to maximize the employer match (if any), nor to generate sufficient income for retirement.

Myth 2: A low contribution default will help minimize opt-outs.


DCIIA notes that research has shown that opt-out rates are no higher when the default contribution rate is 4% or 6% of pay.

Myth 3: Using a higher default contribution rate and/or auto enrolling non-participating existing hires will be too expensive.

Well, perhaps not too expensive, but potentially more expensive, though DCIIA caveats that conclusion with the explanation that match formulas can be altered to incorporate changes in contribution patterns. Moreover, they cite research that suggest that the power of automatic enrollment could well overcome opt-out rates, even if the match formula is altered — such as the so-called “stretch match.”

Myth 4: Participants will object to higher default contribution rates.

DCIIA thinks not — probably not, in fact. But notes that it is important for plan sponsors to remember that workers always have the opportunity to opt out of these programs, or to reduce a more aggressive default rate.