We’ve all kept an eye on default rates creeping upward lately. But here’s what catches my attention: rising defaults don’t just affect participants, they test the backbone of a plan’s design, governance, and fiduciary discipline. As defaults increase, questions cascade: Are your safe-harbor defaults still appropriate? Are participants being nudged properly, or shoved into poor allocations just because inertia took over?
Higher default rates can mask hidden trouble. Plans that lean too heavily on default strategies may see behavior that deviates wildly from expectations. That increases the risk that someone will point at you and say your “qualified defaults” weren’t in participants’ best interests after all.
The fix begins before defaults spike: regularly stress test your default strategy; monitor participant behavior; consider a tiered or graduated approach rather than a one-size option; and document your rationale every step of the way. When default rates go up, the difference between prudent design and litigation bait is how defensible your structure and process were before the risk spike.
Because once default rates are high and things go sideways, plaintiffs and regulators don’t ask whether you hoped it would be fine, they ask how you prepared for exactly this.