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This report includes a summary of key changes, including the salary level test and salary basis test.

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May 16, 2006
Survey Underscores Positive Impact of Automatic Enrollment in 401(k)

An annual study by Hewitt Associates on employees' saving and investing habits reveals that employers that offer automatic enrollment into their 401(k) plans are having a significant and positive impact on employee participation. Among the findings of the study, which was conducted among over 2.6 million employees, was that the overall participation rate of employees in companies that offered automatic enrollment was 14 percentage points higher than the overall participation rate across all companies.

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"Employer efforts to automate, simplify and better communicate the 401(k) plan are making positive differences in improving certain employee investment behaviors and raising participation rates among hard-to-reach demographics," said Lori Lucas, director of retirement research at Hewitt Associates.

Meanwhile, overall, there was good news regarding 401(k) participation rates--in 2005, 36 percent of employees who had worked for their company less than one year participated in a 401(k) plan, a 6 percent increase over 2004.

However, Hewitt noted that this encouraging statistic is somewhat offset by the fact that almost one-third of the employees surveyed either didn't participate in their employer's plan. Meanwhile, of those that did contribute, 22 percent didn't contribute enough to receive the full company match, while an additional 30 percent only contributed just enough to obtain the match.

"Companies that automatically enroll new hires are seeing a big difference in the behavior of lower-tenure workers in 401(k) plans," said Lucas. "But to make an impact on overall participation and contribution levels, companies need to be thinking about offering automatic enrollment to all employees, or combining it with tools like streamlined enrollment and targeted communication. Companies that already offer automatic enrollment should think about ways to further encourage employees to save for retirement, such as adding contribution escalation features, offering third-party investment advice, or providing tools that help employees better understand the value of their 401(k) plans."

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