Impact of Defaults in Retirement Saving Plans: Public Employee Plans

Abstract

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.