Data & Research December 23, 2009

Auto Enrollment Could Lead to Reduced Match

Despite the continued popularity of automatic enrollment among 401(k) plans, research suggests automatic enrollment might work against the long-term goal of increasing workers’ retirement savings by helping bring down the employer match rate.

Reported by

Urban Institute researchers Mauricio Soto and Barbara A. Butrica, who conducted the study for the Center for Retirement Research at Boston College, found that the employers with auto enrollment had match rates about 7% below their non-auto-enrolling counterparts.

Further, the study found that a match-rate cut by 7% would offset at least 42% of cost increases related to auto enrollment in plans with a participation rate of at least 60% before instituting the auto enroll feature. A plan with a 60% participation rate before automatic enrollment would need to reduce the match rate from 50% to 42.9% to offset a 10 % increase in participation, the researchers say.

A key concern, according to the researchers, is whether some sponsors might actually view employer matches in an auto-enroll environment as an unacceptably high corporate expense. They point out that the impact of a match on participation has been shown to be relatively modest beyond the effects of the auto enrollment program.

“The findings of this paper indicate that while automatic enrollment is likely to achieve the goal of increasing pension coverage, it might also work against the principal goal of increasing retirement savings,” according to the research. “The prospect of lower match rates may not only reduce employer contributions to workers’ retirement accounts, but some research suggests that lower match rates might also lower workers’ own retirement contributions.”

After studying 2007 Form 5500 statistics and other data from mostly large plans, the researchers found that 93% of those without auto enrollment offer a match while 82% of those auto enrolling participants had a match. The mean match rate was 47% for plans without auto enrollment and 34% for plans with the feature.

Between 1993 and 2007, agriculture, mining, and construction industries offered the highest match rates (58%) followed by retail trade (57%), and financial, insurance, and real estate industries (54%). Manufacturing and wholesale trade industries averaged match rates between 48% and 49%. Transportation and public utilities, and other services offered the lowest level of match rates (37% and 41%, respectively).

The researchers demonstrated their conclusion by studying the plan dynamics in a hypothetical firm of 1,000 employees in which every worker earns $50,000 and which offers a match of 50% up to the first 6% of contributions (participants contribute 6%). Before the company adopts auto enrollment, the participation rate is 49%. The researchers said the hypothetical employer’s cost of offering the match is $735,000 per year (1,000 employees x 49% participation rate x 50% match rate x 6% contributions x $50,000) and the total labor cost is $50,735,000 ($50,000 x 1,000 + cost of the match).

After the firm adopts automatic enrollment, participation increases from 49% to 86%. The increase in participation increases the match cost by 76% to $1,290,000 and total compensation by 1.1% to $51,290,000, the study found.

Overall, the study looked at 826 plans from 532 employers that hold about half of the total 401(k) assets and account for about 30% of total participants.

The study report is available here.

Compliance December 23, 2009

NAPFA Supports 12b-1 Reform

The National Association of Personal Financial Advisors (NAPFA) is advocating for reform of 12b-1 fees.

Reported by

The professional association of fee-only financial advisers said it “applauds Securities and Exchange Commission Chairman Mary Schapiro for her recent comments about reviewing the appropriateness of 12b-1 fees in mutual funds.”

Schapiro has said recently that she has asked for recommendations about 12b-1 fees in 2010 (“SEC to Make Recommendations on 12b-1 Fees, Target-Date Funds”). “We must critically rethink how 12b-1 fees are used and whether they continue to be appropriate,” she said, speaking at the Consumer Federation of America 21st Annual Financial Services Conference.

NAPFA agrees with that statement. “The purpose of these fees is to offset the marketing and distribution costs incurred by mutual fund companies. However, when you peel back the layers you see that some mutual fund companies are making a profit on 12b-1 fees,” said NAPFA Chairman William T. Baldwin, in a statement.

NAPFA said it continues to recommend the following in order to promote more transparency around 12b-1 fees:

  • renaming 12b-1 fees to be more precise and descriptive (i.e. “brokerage firm compensation” or “brokerage firm reimbursement for account maintenance expenses”);
  • disclosures of a mutual fund’s “total fees and costs,” including 12b-1 fees, reflected in quarterly account statements;
  • point-of-recommendation and point-of-sale disclosures to help advisers and brokers fully disclose the expenses and “hidden costs” of pooled investment vehicles at the time of recommendation and the time of sale.

“Fees associated with investments must be treated like an ‘open book’ that is easily understood by all potential investors. Without clearer disclosure, consumers may not be able to make the most educated decision possible,” said Baldwin.

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