Automatic enrollment boosts participation rates in 401(k) plans significantly, but the quality of participation among automatically enrolled employee is lower than that of employees who contributed through traditional enrollment, according to a study by Hewitt Associates.
Of the 2.6 million U.S. employees Hewitt analyzed, more than 90 percent of workers participated in a 401(k) plan if their company automatically enrolled them, compared with 68 percent for employees at companies that had no offer of automatic enrollment.
However, the study found that most automatically enrolled employees remained at the default contribution rate, and that the majority of companies (70 percent) with automatic enrollment had a default contribution rate of 3 percent or less. Therefore, employees under automatic enrollment contributed less (6.8 percent) than those who were traditionally enrolled (8 percent), the survey found.
"Most employees who are automatically enrolled tend to stick with the employer-provided default contribution rate, so simply getting them into the 401(k) plan at a minimal contribution rate isn't going to help them meet their long-term retirement needs," says Pamela Hess, director of retirement research at Hewitt Associates. "Companies should strongly consider increasing the default contribution rate and coupling automatic enrollment with contribution escalation, which automatically increases employee contributions to the 401(k) plan and helps get them to a better savings rate over time."
Automatically enrolled employees also had less-diversified portfolios and were less likely to actively rebalance or make transfers within their plans. These employees were also less likely to contribute higher than the company match, only contributing up to 1.2 times the match threshold on average compared with 1.6 times for employees voluntarily participating in the 401(k) plan.
The Department of Labor recently proposed a rule that the agency says will make it easier for employers to adopt automatic enrollment in 401(k) plans.
The proposal implements provisions of the Pension Protection Act of 2006 to provide a safe harbor for plan fiduciaries who invest the assets of participants in "qualified default investment alternatives" in the absence of participant investment direction. You can read the proposed rule in the Federal Register: September 27, 2006.