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More Employees Driven to Auto-Enroll for Retirement Plans

While more workers are chipping in for their golden years, the level of contributions continues to lag. Experts say the current 3 percent doesn't cut it. Between 10 and 12 percent is more like it.

March 28, 2013

More employers are automatically registering workers for company 401(k) plans, but the average amount used to start employee accounts remains at 3 percent of pay, a new survey reports.

The March survey, Trends in 401(k) Plans and Retirement Rewards, shows that 56 percent of the 476 respondents automatically enroll workers into a 401(k) plan. That's up 12 percentage points from 2009, when the American Benefits Institute (the research division of the Washington-based American Benefits Council) and Scottsdale, Arizona-based WorldatWork last conducted the survey.

"We know automatic enrollment is a very significant tool," says Lynn Dudley, American Benefits Council senior vice president. "We know it works and we know employees like it."

But while more people are participating in 401(k) plans, the survey shows the majority of employers only use 3 percent of employee pay to automatically initiate retirement accounts—known in the industry as defaulting. That percentage is a far cry from the 10 to 12 percent of annual pay that many experts say needs to be contributed to 401(k) plans for people to be ready for retirement. The report also notes a drop-off in defaults to 53 percent of employers using 3 percent of employee pay, compared to 68 percent using that amount in 2009.

Dudley says a 2006 federal rule that allows employers to pull 3 percent from employee paychecks has many companies stuck on that percentage.

"Congress didn't want to set it too high," Dudley says, adding that survey data show some employers use higher percentages.

Automatically enrolling workers can be an effective step to increase participation rates, especially among workers who might not sign up for a company 401(k) on their own, says Cara Woodson Welch, vice president of policy and public affairs at WorldatWork.

Companies that use automatic enrollment typically show higher participation rates, the survey showed. Nearly 40 percent of employers responding using automatic enrollment showed an 80 to 89 percent participation rate among eligible workers, compared to 21 percent of employers showing the same participation range in plans that don't offer the feature.

Once in a plan, worker accounts typically grow through pre-tax salary contributions which are often matched by their employers, as well as investment gains. More than half of respondents, or 53 percent, say the average employee contribution is 5 percent of pay. A quarter say average employee contributions are 8 percent of pay or higher. That's up 8 percentage points from 2009.

Meanwhile, 92 percent of employers say they offer a match to workers' contributions. Nearly all employers, or 94 percent, say the match comes in cash, while 3 percent contribute company stock and 3 percent contribute a combination of cash and stock.

Dudley and Woodson Welch say many companies need to do a better job of teaching workers about matching contributions. Survey results show more than a third of respondents say about half of their workers aren't contributing enough to take full advantage of the employer match, leaving "free money" on the table.

"Financial security is much simpler to achieve when people are better educated," Dudley says. "People are participating, and some are contributing enough to get the match, but there is room to do more."

Patty Kujawa is a writer based in Milwaukee. Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.