24 September 2018

How 401(k) Automatic Enrollment Affects Plan Participants

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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. 

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