Impact of Defaults in Retirement Saving Plans: Public Employee Plans
This study examines the impact of the adoption automatic enrollment provisions by the state of South Dakota for its supplemental retirement saving plan (SRP). In South Dakota, state and local government employees, including teachers, are also covered by a defined benefit pension plan and by Social Security. Thus, career public employees in South Dakota can expect a life time annuity from these two programs of around 75 percent of their final salary. Prior to the introduction of automatic enrollment, the proportion of newly hired employees who were contributing to the SRP was less than three percent in their first year of employment. After the introduction of automatic enrollment, over 90 percent of newly hired workers who were auto enrolled were participating in the plan. Significant differences compared to earlier studies of auto enrollment include: we are examining public employees who are also covered by a defined benefit retirement plan, prior to the introduction of auto enroll participation were extremely low, and these is no employer match to employee contributions to the SRP. Thus, the key question is whether auto enrollment has the same powerful impact on contributions to a retirement saving plan under these conditions.
We would like to thank Rob Wylie, Executive Director of the South Dakota Retirement System, and his team for providing the administrative data used in this analysis. They also provided useful information about the introduction of automatic enrollment into the 457 plan. We also acknowledge the assistance of Joshua Franzel on earlier work describing the adoption of automatic enrollment in South Dakota. An earlier version of this paper was presented at the 2018 SIEPPR “Working Longer Conference” at Stanford University. Damon Jones, Joanna Lahey, and Anirudh Mylavarapu have provided helpful comments. This project received funding from the TIAA Institute and the Wharton School’s Pension Research Council/Boettner Center. The content is solely the responsibility of the authors and does not necessarily represent official views of the above-named institutions, nor of the National Bureau of Economic Research.