Auto Enrollment Boosts 401(k) Participation Among Minorities

Increase in participation particularly high for black and Hispanic workers

By Stephen Miller, CEBS Oct 12, 2011

Automatic employee enrollment into 401(k) plans in the U.S. raised participation for all racial and ethnic groups, according to research by Vanguard Investments, a provider of 401(k) plan services. The increase was particularly notable for black and Hispanic workers, especially low earners.

“This study confirms that the use of automatic plan design does reduce racial and ethnic disparities in saving and investing behavior through defined contribution retirement plans,” said Cyndy Pagliaro, a Vanguard researcher and lead author of the report. “Plan sponsors concerned about these disparities should consider automatic plan design, but it must be carefully planned to ensure adequate long-term retirement savings for all groups.”

While other industry studies have looked at differences in saving and investing behaviors among racial and ethnic groups, the Vanguard study, In Diversity and Defined Contribution Plans: The Role of Automatic Plan Features, looks at the impact of auto enrollment into 401(k) and other defined contribution (DC) plans on plan participation. Among the findings:

Participation rates jumped more than 60 percent for blacks and 40 percent for Hispanics. Auto enrollment improved the plan participation rate dramatically for black workers—from 57 percent under voluntary enrollment to 94 percent through auto enrollment, a relative increase of more than 60 percent. The Hispanic participation rate rose from 67 percent under voluntary enrollment to 95 percent through auto enrollment, a relative increase of over 40 percent. Auto enrollment participation rates were much higher among whites and Asians as well.

In general, auto enrollment is particularly important for low-income blacks and Hispanics, who are far less likely to participate in a DC plan under voluntary enrollment, according to Vanguard's analysis. The participation rate in voluntary enrollment plans among black workers earning less than $30,000 a year was only 35 percent; it was 36 percent for Hispanic workers in the same income group. These rates jumped to 93 percent and 94 percent, respectively, with auto enrollment.

Whites and Asians tend to override default deferral rates and contribute more. Auto enrollment does not necessarily reduce racial and ethnic group differences in plan savings rates. Whites and Asians were more likely to override their plan’s default deferral contribution rate (most often set at 3 percent of annual salary) and choose a higher one. As a result, deferral rates for whites and Asians with auto enrollment were about 0.5 to 2 percentage points higher than those for blacks and Hispanics. The researchers noted that an automatic annual escalation of deferral rates raised them across the board and over time might mitigate differences in plan savings rates among these groups.

Target-date funds helped participants to be less extreme equity investors. In auto enrollment plans, many participants are defaulted into an automatic investment program such as a target-date fund, which shifts gradually from aggressive to more conservative investments based on a target retirement year. These broadly diversified funds reduce many of the extreme asset allocations seen in voluntary enrollment plans, according to Vanguard's analysis. For example, in voluntary enrollment plans Asians and whites were more likely to be aggressive equity (stock fund) investors, while blacks were more apt to be zero-equity investors. By smoothing those allocations, target-date funds reduced differences in risk-taking among these groups.

Vanguard researchers analyzed 2010 data for more than a quarter million participants in seven large defined contribution plans with automatic plan features.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​​

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