Automatic enrollment appears to increase participation in 401(k)-type defined contribution retirement plans significantly but might not be suitable for all plan sponsors, according to an October 2009 report by the U.S. Government Accountability Office (GAO).
As recounted in Retirement Savings: Automatic Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for Other Workers Could Face Challenges, studies found that participation rates can reach as high as 95 percent under automatic enrollment. That's driving more organizations to "go automatic," with the percentage of U.S. 401(k) plans that adopted automatic enrollment policies increasing from about 1 percent in 2004 to more than 16 percent in 2009—with higher rates of adoption among large plan sponsors.
In most cases, these plans enroll only new employees automatically, the GAO found.
|
Adoption and Scope of Automatic Enrollment by Plan Size
(percent of plans, as of March 2009) |
|
Plan Size |
New or Recent Hires Only |
All Eligible Employees |
|
Large |
32.2% |
8% |
|
Mid-sized |
24.8% |
7.2% |
|
Small |
7.5% |
6.6% |
|
Source: Government Accountability Office |
Further, some data show that while automatic escalation policies—which increase savings rates automatically over time—are becoming increasingly common, they still lag behind adoption of automatic enrollment. According to data from Fidelity Investments, a large 401(k) plan administrator, only about 45 percent of plans with automatic enrollment had adopted a default automatic escalation feature as of March 2009. In combination with low initial default contribution rates, that could depress savings for some workers.
Not for All
Other challenges noted by the GAO include:
• Automatic enrollment might not be suitable for all plan sponsors, such as those with a low-wage and high-turnover workforce, including retail establishments and restaurant chains. These organizations raise concerns that automatic enrollment could lead to additional costs, administrative burdens and the prospect of limited benefits for employees, who might accumulate very small balances and be more likely to abandon them or take a lump-sum distribution on separation.
• Automatic enrollment might not be suitable for those nearing retirement. The emergence of target-date funds as the typical default investment might help ensure that workers have a more age-appropriate mix of bonds and stocks. However, questions regarding the level of risk for substantial losses borne by these funds were raised after the 2008-09 stock market plunge, when some target-date funds designed for those expecting to retire in or around 2010 lost 25 percent or more in value.
The GAO report states that, as advocated by retirement specialists, additional education materials could help plan participants become more aware of the value and risks of target-date funds.
Additional Approaches
Other proposals could expand the portion of the workforce saving for retirement, but these approaches could face their own challenges, the GAO noted. For instance, under a federally mandated automatic individual retirement account (IRA), certain employers could be required to enroll eligible employees in payroll-deduction IRAs unless the workers specifically opted out. Such a proposal could broaden the population that saves for retirement at minimal cost to employers. However, the GAO found, this proposal faces a number of challenges, including uncertainty about the extent to which it would help low-income workers accumulate significant retirement savings.
Likewise, proposals for state-assisted retirement savings programs could raise coverage and, ultimately, savings by involving state governments in facilitating retirement savings for workers without access to an employer-sponsored plan. However, such programs face uncertainty about employer and worker participation levels as well as legal and regulatory issues, the GAO concluded.
Stephen Miller is an online editor/manager for SHRM.
Related Articles:
Participants Mostly Satisfied with Target-Date Funds, SHRM Online Benefits Discipline, October 2009
Employer Commitment to Workers’ Retirement Plans Declines, SHRM Online Benefits Discipline, October 2009
Global Trend: Automatic Features in Defined Contribution Plans Gain Acceptance, SHRM Online Benefits Discipline, October 2009
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