Study Finds Link between Auto-enrollment, Higher Match in Large Plans

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.

EBRI Counters another Study

The Employee Benefit Research Institute (EBRI) said its finding that employers adopting automatic enrollment in their 401(k) plans have also generally increased the employer match to participant’s accounts contradicts an earlier publication of the Center for Retirement Research (CRR) at Boston College and by the Urban Institute. The CRR concluded that among a sample of large 401(k) plans, match rates are lower among firms with automatic enrollment than among those without automatic enrollment after controlling for firm characteristics (see “Auto Enrollment Could Lead to Reduced Match”).

An EBRI news release said there were two major limitations with the CRR/Urban Institute analysis:

• The study was based on U.S. Department of Labor Form 5500 data that does not include specific information on 401(k) match rates. Instead, the authors constructed an estimate for the match rate as the ratio of employer-to-employee contributions for each 401(k) plan; and
• The study merged the Form 5500 data with information about automatic enrollment from the Pensions & Investments database of the top 1,000 pension funds, which includes a flag indicating whether plan administrators reported offering automatic enrollment in their defined contribution (401(k)-type) plans.

However, this database does not report the year that the automatic enrollment provision was adopted, so there is no way to tell from this data source how long auto-enrollment had been implemented in a plan.

The authors of the CRR/Urban published study presented a regression analysis on this database and produced a finding that "suggests a negative relationship between automatic enrollment and match rates and is statistically significant at the firm level. In particular, match rates are about 7 percentage points lower among firms with automatic enrollment than among those without automatic enrollment, after controlling for firm characteristics." EBRI noted that the key word is "suggest."

"While the authors correctly point out that although the regressions suggest a relationship between automatic enrollment and match rates, they do not necessarily imply that auto-enrollment causes lower match rates," EBRI said.

EBRI also noted that the CRR/Urban Institute study conflicts with previous EBRI research published in 2007, which surveyed Mercer Human Resource Consulting defined benefit sponsors to gauge their recent activity and planned modifications to their defined benefit and defined contribution plans to determine what, if any, increases in employer contributions to defined contribution plans were provided in conjunction with reductions to their defined benefit plans.

Although the association between the adoption of automatic enrollment and employer contributions to 401(k) plans was not the focus of the EBRI study, one-third of the defined benefit sponsors surveyed indicated that they had already increased or planned to increase their employer match to a defined contribution plan, and 20.9% indicated that that they had already increased or planned to increase their non-matching employer contributions to a defined contribution plan. There was some overlap between the two groups, but overall, 42.5% of the defined benefit sponsors surveyed indicated that they had already increased or planned to increase their employer match and/or non-matching employer contribution to a defined contribution plan.

This was particularly true of defined benefit sponsors that had either closed a defined benefit plan to new hires or frozen the plan to all members in the prior two years or planned to do so in the following two years.

Full results of the recent EBRI analysis will be available in the February 2010 EBRI Issue Brief at www.ebri.org.