In fact, the current 401(k) model offers no incentive for employers to make sure their employees are contributing enough of their compensation to receive an employer match, according to "Future Retirement Income Security Needs Defined Benefit Pensions."
"Between 2002-2004, if all eligible workers participated in the employers’ 401(k) plans, employers would have had to contribute 26 percent more—for an annual total of $3.17 billion," the paper says. This is why 82 percent of plan sponsors don’t offer automatic enrollment, according to the paper, which was written by Teresa Ghilarducci, a professor at the University of Notre Dame.
But there are various reasons that companies don’t offer automatic enrollment, says Silvia Frank, manager of the defined-contribution plan at Trinity Health. The Novi, Michigan-based health care provider has a defined-benefit plan, a 403(b) and a 401(k) plan that doesn’t have automatic enrollment.
"To make such a blanket statement is absurd," she says. While cost is one reason that Trinity Health does not automatically enroll its employees, the company also recognizes several benefits of using targeted communications instead of automatic enrollment, she says.
"We know that the people who are contributing more to their 401(k) plans are the ones who are more likely to stick around," she says. Seventy percent of Trinity Health’s eligible employees participate in its 401(k) and 403(b) plan.
It’s true that employers use 401(k) plans to recruit and retain valued workers, and that may mean not automatically enrolling every employee at the level of the match, experts say.
"One nice thing about 401(k) plans and matching is that you can allocate your resources to those that care enough," says Jack Vanderhei, a professor at Temple University in Philadelphia and a fellow with the Employee Benefit Research Institute.
Also, nondiscrimination rules, which mandate that employers have a certain percentage of low-income workers contributing to the plan, make sure that employers are fair with targeting their benefits, says Ed Ferrigno, vice president of Washington affairs at the Profit Sharing/401(k) Council of America, a trade group of plan sponsors.
But more needs to be done to ensure that all employees receive an employer match, says Christian Weller, a senior economist at the Center for American Progress.
The center would like to see legislation requiring employers to make a mandatory contribution regardless of what the employee does, similar to a defined-benefit plan, Weller says.
That might be a nice idea, but it’s unlikely to happen anytime soon, Vanderhei says. A similar proposal was made under President Carter and didn’t go anywhere, he says.
"If it wasn’t going anywhere in the late ’70s, it’s hard to see anything like this having a chance in the world today," he says.