Employers offsetting auto-enrollment costs through reduced matching contributions and low default rates, study finds

Auto-enrollment policies are raising employee participation rates, but could result in reduced retirement savings as employers compensate for the costs of increased participation by reducing matching contributions and adopting low default deferral rates, according to researchers at the Center for Retirement Research at Boston College. The researchers caution that, while automatic enrollment will increase the retirement savings of workers who would not otherwise participate in the plan, the experience of other employees in plans maintained by employers that are closely managing 401(k) compensation costs may actually be reduced savings.

Note: The analysis was based on restricted data reported in the U.S. National Compensation Survey conducted by the U.S. Bureau of Labor Statistics covering the 2010-2011 period. The sample data, for purposes of the study, was restricted to single defined contribution plans with a flat match rate.

Costs of auto-enrollment

Auto-enrollment has proven to be effective at increasing plan participation. The study noted that participation rates in plans with auto-enrollment (77%) are 10 percentage points higher that in plans without automatic enrollment (67%). However, higher rates of participation also increase an employer’s total compensation costs.

The concern with these higher costs is typically cited by employers that do not incorporate automatic enrollment into their plans. However, employers are increasingly adopting measures that offset the increased cost of automatic enrollment.

Reduced match rate

Employers may manage increased participation costs by lowering the match rate per dollar of employee contributions and/or reducing the ceiling on the percent of contributions it will match. The study confirmed the effectiveness of this option, reporting that workers covered by auto-enrollment have a maximum match rate of 3.2% of pay, compared to 3.5% for employees in plans without automatic enrollment.

Significantly, the study indicated that plans with auto-enrollment have a maximum match rate that is 0.38 percentage points lower than plans without automatic enrollment, even when factors such as alternative defined benefit plan coverage are considered. Thus, defined benefit plan coverage does not account for the lower match in auto-enrollment plans.

Low default contribution rates

A second option for employers is to individually reduce matching contributions by setting a default employee contribution rate below the level needed to obtain the maximum employer match. The study found that the default rate in sample plans studied was set well below the rate needed to trigger the maximum match. On average, the default contribution rate in auto-enrollment plans was 3.4%. However, employers in the sample plans needed to contribute at an average of 5.1% in order to receive the maximum match available.

Participants have the option of overriding the default contribution and saving at a higher rate. However, studies have found that auto-enrolled participants generally do not adjust their contribution rates once enrolled.

Note: The study further noted that the employee contribution rate in auto-enrollment plans was significantly lower than the median rate of 6% reported in plans that do not feature auto-enrollment. However, it can be assumed that the higher deferral rates in such plans reflect the behavior of participants who are more actively invested in their retirement planning and thus, are not the target of auto-enrollment.

Total compensation costs

Employers that have implemented auto-enrollment are effectively managing compensation costs. The study found no evidence of a difference in total compensation, 401(k) costs, non-401(k) costs, or wages between plans with and without auto-enrollment. Thus, employers are not offsetting higher match costs by reducing employee wages or other non-401(k) benefits. While employers are spending more on workers who would not have participated without auto-enrollment, they are effectively managing costs by spending less on employees who would have participated in the plans absent auto-enrollment.

Source: “How Does 401(k) Auto-Enrollment Relate to Employer Match and Total Compensation?” Barbara A. Butrica and Nadia S. Karamcheva, Center for Retirement Research at Boston College, October 2013, No. 13-14.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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