According to a recent study by the Center for Retirement Research
at Boston College, when an employer includes an automatic enrollment provision
for their 401(k) plan, more people participate in the plan. But the effect of
automatic enrollment on overall 401(k) savings indicates that many employees
are saving less than when signing up voluntarily. Additionally, some employers
have reduced their matching component in order to keep costs down.
Participation rate concerns. When a plan includes automatic enrollment,
participation rates are 10 percentage points higher (77 percent) than those
without it (67 percent), according to the Boston College study. But the study
also shows that in general, employers with automatic enrollment offer a lower
matching component. The data showed that plans with automatic enrollment had an
average maximum match percentage of 3.2 percent compared with 3.5 percent for
plans without automatic enrollment. This difference can have a significant impact
on the overall savings rate of the employees.
Contribution rates miss out on maximizing match. Another concern is
the low level of deferral amount on plans with the automatic enrollment
provision. The average default contribution for plans with automatic enrollment
is 3.4 percent, which is far lower than the average of 5.1 percent of pay
employees need to contribute to maximize the employer match.
Default investment options. When employees are automatically
enrolled in a plan, unless they make an investment election, their money is
typically invested in a target-date fund. Depending on personal circumstances,
target-date funds may not meet their needs from a risk tolerance perspective,
despite the green light these funds have received as default investments from
the Department of Labor.
An employer’s decision on plan
design can have a significant impact on how much workers save for retirement,
both from salary deferral and potential employer match. While successful in
raising participation rates overall, automatic enrollment may not have the
desired result in preparing workers for retirement. Since these plan provisions
are relatively new, it is important for employers to monitor actual results and
determine whether these provisions are having the desired outcome.