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Compliance March 19, 2010
Auto-Enrollment Produces Greater Benefit for Young, Low-Income Workers
Research from the Employee Benefit Research Institute (EBRI) found that automatic enrollment of participants in 401(k) plans is likely to be most beneficial to young and low-income workers, although high-income workers are likely to benefit from it as well.
Reported by Rebecca Moore
“The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” in the April 2010 EBRI Issue Brief, is an expansion of earlier results released in January, which found that large employers adopting automatic enrollment in their 401(k) plans have generally increased the employer match to participant’s accounts—in some cases, by a significant amount (see “Study Finds Link between Auto-enrollment, Higher Match in Large Plans”).
The analysis found that under baseline assumptions, the median 401(k) accumulations for the lowest-income quartile of workers currently age 25 to 29 (assuming all 401(k) plans were voluntary enrollment plans as typified by the 225 large plan sponsors described above) would only be 0.08 times final earnings at age 65. However, if all 401(k) plans are assumed to be using the large plan sponsor auto-enrollment provisions, the median 401(k) accumulations for the lowest-income quartile jumps to 4.96 times final earnings (if 401(k) participants revert back to the default contribution when they change jobs) and 5.33 times final earnings (if they retain their previous contribution level when they change jobs).
There are also large increases even for high-income workers: The multiple under a voluntary enrollment scenario is 2.41 times final earnings compared with 9.15 or 9.81 under auto-enrollment, depending on the assumptions for employee reversion to default contribution rates upon job change.
This EBRI study analyzed plan-specific data of 1,000 large defined contribution plans for salaried employees from Benefit SpecSelect (Hewitt Associates LLC) in 2005 and 2009 to compare a subsample of plan sponsors that did not have auto-enrollment in 2005 but had adopted it by 2009.
The study is available at www.ebri.org.