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Auto Enrollment Helps Push Record Defined Contribution Plan Participation

May 27, 2011
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Aided by increased employer adoption of automatic enrollment programs, a record percentage of employees are participating in 401(k) and other defined contribution plans, according to an analysis released May 24.

The Aon Hewitt analysis found that in 2010, an average of 75.8 percent of eligible employees participated in their company’s defined contribution plans, up from 73.7 percent in 2009 and 67.2 percent in 2005.

Aon Hewitt says the increased participation rate is due in large part to increased employer adoption of automatic enrollment programs. Under such programs, employees who don’t choose one way or another are automatically enrolled, unless they specifically object.

Sixty percent of the 120 employers whose plans were analyzed had an automatic enrollment feature in 2010, up from just 24 percent in 2006. In 2006, Congress passed legislation removing certain roadblocks that discouraged employers from offering automatic enrollment, while later Labor Department rules gave employers offering automatic enrollment programs protection from fiduciary liability if they met certain requirements.

Among employees subject to automatic enrollment, 85.3 percent participated in the plan, about 18 percentage points higher than those not subject to automatic enrollment. Typically, employers only offer automatic enrollment to new employees.

While participation in defined contribution plans is rising, employee contributions are not. In 2010, employee pretax contributions averaged 7.3 percent of pay, unchanged from 2009 and down from an average of 7.7 percent in 2007.

Aon Hewitt says the growth in automatic enrollment programs may be adversely affecting the average employee contribution rate. That’s because contribution rates for employees subject to automatic enrollment averaged 6.8 percent of pay compared with an average contribution rate of 7.8 percent for those who actively enrolled. The reason for the big contribution difference rate between the two groups is that most employers with automatic enrollment programs set the default contribution rate at 4 percent of pay or less.

In addition, just under 30 percent of defined contribution plan participants don’t contribute enough to receive a matching employer contribution, the analysis found.
The analysis also found that participants’ account balances averaged $76,020 at the end of 2010, up from $70,970 a year earlier, but still below the 2007 level of $79,570.  

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, email editors@workforce.com.

 

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