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Automatic Enrollment Boosting 401(k) Participation

October 6, 2008

There’s more evidence that growth in 401(k) plan participants with account balances is dovetailing with the increase in plans using automatic enrollment
 
More than four out of five eligible employees had balances in their 401(k) plans in 2007, up from 78.9 percent in 2006, with increased employer use of automatic enrollment accounting for the rise, according to a recent survey by the Profit Sharing/401(k) Council of America in Chicago. 
 
“More than half of large plans utilize this feature, and usage by small plans doubled,” PSCA president David Wray said in a news release about the survey. 
 
That comes as no surprise to Pamela Hess, director of retirement research at Hewitt Associates Inc. in Lincolnshire, Illinois. She said automatic enrollment can increase employee participation by as much as 20 percent, based on Hewitt’s research. 
 
“It [auto-enrollment] is an increasing trend,” Hess said. “When you default employees into automatic enrollment plans, you absolutely get a participation-rate increase.” 
 
Still, further gains in employee participation could be had if pension-plan executives went back to existing employees who aren’t participating in the plan and re-enrolled them into 401(k) plans, Hess said. 
 
“Most companies do not ‘back sweep’ [enroll employees who declined participation initially] and enrolling existing hires will be much more painful,” Hess said. “Paychecks will go down for existing employees, while for new hires the money is never there to miss.” 
 
Jamie Kalamarides, senior vice president for Prudential Retirement Services in Hartford, Connecticut, said that once new employees are enrolled into a company’s retirement plan, plan officials should use automatic escalation, raising employee contributions to ensure adequate and increased retirement funds are available for employees. 
 
“Those two things [auto-enrollment and auto-escalation] combined will help participants make the right decisions and create the right inertia in savings for the future,” Kalamarides said. 
 
Hess cautioned that more employees enrolling in a company’s retirement plan and automatic increases in contributions could mean higher costs to a company in matching contributions and a potential strain on company profits. 
 
“Some companies just cannot afford to re-enroll existing employees due to these higher matching contribution costs,” she said. 
 
The PSCA survey also reported that the typical 401(k) plan has 65 percent of assets in equities, unchanged from 2006. Assets most frequently are invested in active domestic equity funds, followed by indexed domestic equity funds, stable-value funds and balanced stock/bond funds.

Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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