January 22, 2010
--- Research from the Employee Benefit Research Institute (EBRI) found that
employers adopting automatic enrollment in their 401(k) plans have also
generally increased the employer match to participants' accounts—in
some cases, by a significant amount. ---
According to a news release, the EBRI research is the first using actual plan information on both actual auto-enrollment and actual match rate information both before and after adoption of auto-enrollment. Using plan-specific data for large employers from Hewitt Associates, the analysis found that employers instituted more generous contribution rates after adopting automatic enrollment, and did so when measured by several different standards.
EBRI analyzed 225 large defined contribution plans that had adopted auto-enrollment in their 401(k) plans by 2009, but did not have them in 2005 (the last observation that was not influenced by the Pension Protection Act). It found the average 2009 first-tier match rate was 87.78%, while the average 2005 first-tier match rate was 81.26%; the average effective match rate for 2009 was 4.32% of compensation, but only 4% of compensation in 2005; and the average total employer contribution rate for 2009 was 6.35% of compensation and 5.46% of compensation in 2005.
The findings suggest that "to the extent that this sample is representative of the universe of large 401(k) sponsors, those sponsors adopting [automatic enrollment] were more generous to the 401(k) participants … after automatic enrollment was implemented than they were before," EBRI said in the news release.
DB Plan Influence
EBRI also combined the match rate findings with defined benefit information for the same sponsors in an attempt to analyze whether its 2007 findings of the association between defined benefit freezing/closing and enhanced 401(k) contributions were corroborated. The average improvements for all three metrics were much higher for sponsors that had frozen/closed their defined benefit plans than for the overall average.
According to EBRI, the change in the total employer contribution rate for all frozen plans was 1.64% of compensation versus 0.89% for the overall average. Employers that had closed their defined benefit plans to new employees had an even larger average improvement of 2.82% of compensation.
The defined benefit sponsors that had frozen or closed their plans were then split into those that had done so prior to adopting automatic enrollment and those that had changed their defined benefit plans between 2005 and 2009 to see if the 401(k) improvements were a result, at least in part, of the employers making up for decreased accruals in the defined benefit plans. If this were true, EBRI said, one would expect that the earlier improvement would be smaller than those that took place approximately at the time of the conversion to auto-enrollment, and this is exactly what EBRI found.
The average total employer contribution improvement for firms that had frozen their plans prior to 2005 was 0.69% of compensation, compared to 2.45% for those that froze between 2005 and 2009. Similarly, the average improvement in total employer 401(k) contribution was only 0.56% of compensation for those that closed their plan to new employees prior to 2005, but 3.34% for those that closed the plan between 2005 and 2009.