Large U.S. employers adopting automatic enrollment in their 401(k) plans have generally increased the employer match to participants’ accounts—in some cases, by a significant amount—according to research from the not-for-profit Employee Benefit Research Institute (EBRI).
The EBRI research looked at match rates before and after adoption of auto enrollment, using data provided by consultancy Hewitt Associates. A key finding: Large employers instituted more generous contribution rates after adopting automatic enrollment and did so when measured by several standards. The findings were published in the February 2010 EBRI Issue Brief.
“Our recent analysis of plan-specific data shows that, at least among large 401(k) plans, plan sponsors actually increased the generosity of their contribution rates,” says Jack VanDerhei, EBRI research director and author of the analysis. He noted that EBRI has published three simulation studies since 2005 showing the potential importance of automatic enrollment for retirement account accumulation, even under the assumption that employer contribution rates would not change when the 401(k) plan was modified.
“The modifications to 401(k) plans made by sponsors in response to the Pension Protection Act of 2006 [provisions of which promoted use of automatic enrollment] will be very important for retirement income adequacy in this country. Adding these more realistic assumptions to our simulation model will allow us to more accurately demonstrate the relative improvements in retirement accounts, especially for young and low-income workers,” he added.
Contrary Findings Refuted
The EBRI results contradict a recent study by the Center for Retirement Research (CRR) at Boston College and the Urban Institute, which concluded that among a sample of large 401(k) plans, match rates are lower among firms with automatic enrollment than among those without automatic enrollment after controlling for firm characteristics. However, according to EBRI, there were two major limitations with the CRR/Urban published analysis:
• The study was based on U.S. Department of Labor Form 5500 data that does not include specific information on 401(k) match rates. Instead, the authors constructed an estimate for the match rate as the ratio of employer-to-employee contributions for each 401(k) plan.
• The authors merged the Form 5500 data with information on automatic enrollment from the Pensions & Investments database of the top 1,000 pension funds, which includes a flag indicating whether plan administrators reported offering automatic enrollment in their defined contribution plans. However, this database does not report the year that the automatic enrollment provision was adopted, so there is no way to tell from this data source how long auto enrollment had been used in a plan.
The authors of the CRR/Urban published study presented a regression analysis on this database and produced a finding that "suggests a negative relationship between automatic enrollment and match rates and is statistically significant at the firm level. In particular, match rates are about 7 percentage points lower among firms with automatic enrollment than among those without automatic enrollment, after controlling for firm characteristics."
While the authors point out correctly that although the regressions suggest a relationship between auto enrollment and match rates, they do not necessarily imply that auto enrollment causes lower match rates. However, this crucial qualification was generally ignored in news media accounts of the study.
The EBRI study used three metrics to access whether plan sponsors were more or less generous after adopting auto enrollment:
• The average 2009 first-tier match rate was 87.78 percent vs. the average 2005 first-tier match rate of 81.26 percent. The difference of 6.52 percentage points suggests that, to the extent that this sample is representative of the universe of large 401(k) sponsors, those sponsors adopting auto enrollment were more generous to their 401(k) participants than before.
• The average 2009 effective match rate was 4.32 percent of compensation vs. only 4 percent of compensation in 2005. The increase of 0.32 percentage point again suggests that large 401(k) sponsors adopting auto enrollment were more generous to their 401(k) participants than before.
• The average total employer contribution rate for 2009 was 6.35 percent of compensation vs. 5.46 percent of compensation in 2005. The increase of 0.89 percentage point once more suggests that those large 401(k) sponsors adopting auto enrollment were more generous to the 401(k) participants than before.
The EBRI study analyzed 225 large defined contribution plans that adopted auto enrollment from 2005 to 2009.
Stephen Miller is an online editor/manager for SHRM.
401(k) Auto Enroll, Higher Matches Yield Employer ROI, SHRM Online Benefits Discipline, July 2007
Automatic 401(k) Features Raise Participation, Savings, SHRM Online Benefits Discipline, July 2007
SHRM Online Benefits Discipline