Auto-Enroll Boosts Participation, Hurts Contribution Rates

Aon Hewitt’s analysis of DC saving and investing behaviors included more than 3 million employees across 120 large companies. The data show that more than three quarters (75.8%) of eligible employees participated in their company’s DC plan in 2010 — the highest level since Aon Hewitt began tracking this data in 2002. This is up from 73.7% in 2009 and 67.2% in 2005.

Aon Hewitt says this record-high participation rate is due in large part to the rapid adoption of automatic enrollment. Three in five employers automatically enrolled employees into their DC plans in 2010, up from 24% in 2006. For employees who were subject to automatic enrollment, Aon Hewitt’s analysis found that 85.3% participated in their DC plan, 18 percentage points higher than those that were not subject to automatic enrollment. However, most companies (85% of those offering automatic enrollment) only automatically enroll new hires, resulting in the gradual uptick in participation rates.

“Automatically enrolling employees in company-sponsored DC plans is an easy way for companies to encourage workers to save more. However, this really is only a nudge in the right direction,” explained Pamela Hess, director of retirement research at Aon Hewitt.

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Contribution rates  

Aon Hewitt's analysis also found that before-tax contributions to DC plans were unchanged from 2009 at 7.3% of pay, but are still down slightly from pre-recession levels in 2007 (7.7%). For workers that are automatically enrolled in the plan, automation may actually hinder the amount of money they are contributing, the data suggest. Participants who were subject to automatic enrollment contributed one percentage point less, on average, than their actively enrolled counterparts (6.8%, compared to 7.8%). This significant gap is due to low default rates among the bulk of employers. More than three quarters of plans (76%) default contribution rates at 4 % or less.

"Saving even just one percent less over a career has a dramatic impact on accumulation," cautioned Hess. "Ultimately, it can lead to nearly a 15 percent loss in retirement income."

In addition to generally low contribution rates, many workers still aren't contributing enough to their 401(k) plan to receive matching employer contributions. Overall, nearly three in ten (29.4%) of plan participants contributed below the company match threshold, up slightly from 2009 (28.2%).

Among participants who were defaulted, this picture is bleaker. Forty-one percent of participants who were automatically enrolled are not saving enough to receive the full match from their employers, compared to 25% of participants who proactively enrolled.   

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Other findings from the Aon Hewitt study include:

• Cumulatively, workers on average saved 10.4 % of pay, including 3.8% from employer contributions.
• The average employee's total plan balance was $76,020 at the end of 2010, while the median balance was $24,680.
• The three largest asset class exposures (equally weighted) were premixed portfolios (33.3%), large U.S. equity (14.2%) and GIC/stable value funds (13.6%).
• The average worker's overall exposure to equities rose 67.4% in 2010, up from 66.9% in 2009.
• The median rate of return earned by employees in 2010 was 13.5%, down from 24.3% in 2009. The median, annualized, three-year rate of return earned (from 2008-2010) was just 1.7%, illustrating the dramatic impact losses in 2008 had on participant results.
• When available, 60.1% of workers invested at least partially in premixed portfolios, mainly driven by the popularity of target-date funds. Among those using premixed portfolios, just under half (46%) were fully invested in a single portfolio. 
• Despite strong market returns in 2009, only 14.2% of employees made any sort of fund transfer in 2010, down from 16.2% in 2009.
• Nearly three in ten participants (27.6%) had a loan outstanding at the end of 2010, the highest in the ten years that Aon Hewitt has been tracking loans.
• In 2010, 6.9% of workers took a withdrawal from their DC plan, close to the record high of 7.1% in 2009. Among these, 20% were hardship withdrawals.