Public sector employees show high acceptance of default investments in defined contribution plans
A new study from MissionSquare Research Institute reveals that public sector employees exhibit high acceptance rates of default investments in defined contribution (DC) plans. The study, titled "Default Investment Acceptance Among Public Defined Contribution Plan Participants," explores how demographic factors (such as age, income, and gender) and economic factors (such as market volatility) influence the acceptance of default investments among public sector employees.
This research, co-authored by Zhikun Liu, PhD, CFP®, Vice President, Head of MissionSquare Research Institute at MissionSquare Retirement, and David Blanchett, PhD, CFP®, CFA, Managing Director and Head of Retirement Research at PGIM DC Solutions, highlights the importance of default investment options, such as target-date funds, in helping employees save for retirement. The study also compares the default investment acceptance rates of public sector employees with those of private sector 401(k) participants.
Key findings of the report include:
High Acceptance Rates: Public sector employees have a high acceptance rate of default investments in their DC retirement plans, with over 80 percent of participants accepting the default option across all ages.
Demographic Influences: Default investment acceptance declines with age and income levels but is higher among female participants.
Market Volatility Impact: The study found that market conditions, such as the volatility experienced in 2020, can significantly affect default investment decisions, particularly among older participants.
Comparison with Private Sector: Public sector employees are more likely to accept default investments compared to their private sector counterparts, even when controlling for age and income.
Impact of Income on Default Investment Acceptance: Default investment acceptance rates decrease with both age and income, with younger, lower-income participants having the highest acceptance rates.
Opt-Out Rates: Public employees who initially accept the default investment have a low opt-out rate, approximately one percent per year, but this rate increases with age and income.
“This research underscores the importance of well-designed default investment options in public sector DC plans,” said Zhikun Liu, PhD, CFP®, Head of MissionSquare Research Institute. “Our findings suggest that public sector employees benefit from these default options, which help them make better retirement saving decisions.”
The study uses panel data from approximately 340,000 newly enrolled participants in public DC plans across four years (2020 – 2023), with a focus on those using target-date funds as the default investment. The analysis also included a limited number of plans using stable-value funds as default investments.
The findings highlight the need for employers and policymakers to design effective default investment options and strategies to encourage better retirement planning. Employers should consider implementing programs to revisit default investment decisions, especially during periods of market volatility.
For more detailed information and insights, access the full report at missionsq.org.
About MissionSquare Research Institute
MissionSquare Research Institute promotes excellence in state and local government and other public service organizations to attract and retain talented employees. The organization identifies leading practices and conducts research on retirement plans, health and wellness benefits, workforce demographics and skill set needs, labor force development and topics facing the nonprofit industry and education sector. MissionSquare Research Institute brings together leaders and respected researchers.
About MissionSquare Retirement
Since our founding in 1972, MissionSquare Retirement has been dedicated to simplifying the path to retirement security for public service employees. As a mission-based financial services company, we manage and administer over $72.0 billion in assets.* Our commitment to delivering results-oriented retirement plans, education, investments, and financial education sets us apart. Explore how we enable public service workers to build a secure financial future. For more information, visit www.missionsq.org or follow the company on Facebook, LinkedIn, and X.
*As of December 31, 2024. Includes 457(b), 401(k), 403(b), Retirement Health Savings (RHS) plans, Employer Investment Program (EIP) plans, affiliated IRAs, and investment-only assets.