South Dakota State’s Retirement Plan Experience Shows Power of Automatic Enrollment to Dramatically Increase Participation

A plan that provides a blueprint for other states to boost employee retirement savings.

(9/15/10) A study of South Dakota’s Supplemental Retirement Plan (SRP) has found that instituting automatic enrollment programs results in a staggering leap in participation rates. The study followed several dozen government units in the first eight months of the program. Ninety-one percent of new, eligible employees are participating in the SRP in units that adopted automatic enrollment, versus 1 percent of new hires in units without automatic enrollment. The study was commissioned by Retirement Made Simpler (RMS) and conducted by the Center for State and Local Government Excellence.

Under automatic enrollment, employees are enrolled in the plan automatically, at a set amount in a pre-set investment choice. Employees have the ability to change the amount they save, invest in a different fund and opt out at any time.

“The immediate success in South Dakota affirms that adopting automatic enrollment is one of the most effective ways to increase retirement savings participation by employees,” said John Gannon, Senior Vice President of FINRA, a founding partner of the Retirement Made Simpler coalition. “This study shows how other states can dramatically aid their employees in preparing for retirement simply by instituting features such as automatic enrollment—and other features such as automatic escalation.” Only a few states, including Texas, Alaska, Virginia and Indiana currently offer automatic enrollment.

“South Dakota is an example for other states,” said Joshua Franzel, study co–author and vice president of research for the Center for State and Local Government Excellence. “Our study offers lessons learned from the new SRP automatic enrollment implementation that will inform the efforts of other governments considering similar policies. Automatic enrollment is a useful feature that can be used by public employers to continue to provide retirement security to public servants across the U.S.”

David C. John, Deputy Director of the Retirement Security Project, another founding member of the Retirement Made Simpler coalition, said, “This is the latest evidence that automatic enrollment is one of the simplest things employers are doing to ensure the majority of their employees are planning adequately for retirement costs. Small opt-out rates suggest employees recognize they needed the extra push to start saving.”

The South Dakota legislature unanimously authorized the automatic enrollment program because of its concern about the low savings rates of certain demographic groups, uncertainty surrounding the future of Social Security benefits and the decline of personal savings rates nationwide.

“State employees have a strong combination of retirement benefits, including a pension, but the supplemental retirement savings plan is also integral to retirement security,” explained AARP’s South Dakota state director, Sarah Jennings. “By unanimously approving the authorization of automatic enrollment into the SRP, the legislature followed the lead of many private sector companies, who have found automatic features extremely helpful in getting employees to save earlier than they might otherwise do and, in so doing, grow their retirement nest egg.”

The combination of pension benefits and Social Security replaces approximately 75 percent of the final pre-retirement earnings of a South Dakota retired state employee with 20 to 25 years of service, the average length of service for retiring state workers according to the South Dakota Retirement System. To encourage public employees to save even more for retirement, South Dakota created the SRP, which allows participants to save on their own, while postponing the payment of income tax on both contributions and earnings until retirement. In 2008, legislation was passed authorizing the South Dakota Retirement System to begin automatic enrollment in the SRP.

Read the full study.

Retirement Made Simpler is a coalition formed by AARP, the Financial Industry Regulatory Authority (FINRA) and the Retirement Security Project (RSP). The coalition was created specifically to inspire and support employers who want to help their employees save more for retirement. By providing companies with the tools and information they need to automate their 401(k) plans, more Americans will achieve a safe and secure retirement.