Auto Enrollment Could Lead to Reduced Match

Despite the continued popularity of automatic enrollment among 401(k) plans, research suggests automatic enrollment might work against the long-term goal of increasing workers’ retirement savings by helping bring down the employer match rate.

Urban Institute researchers Mauricio Soto and Barbara A. Butrica, who conducted the study for the Center for Retirement Research at Boston College, found that the employers with auto enrollment had match rates about 7% below their non-auto-enrolling counterparts.

Further, the study found that a match-rate cut by 7% would offset at least 42% of cost increases related to auto enrollment in plans with a participation rate of at least 60% before instituting the auto enroll feature. A plan with a 60% participation rate before automatic enrollment would need to reduce the match rate from 50% to 42.9% to offset a 10 % increase in participation, the researchers say.

A key concern, according to the researchers, is whether some sponsors might actually view employer matches in an auto-enroll environment as an unacceptably high corporate expense. They point out that the impact of a match on participation has been shown to be relatively modest beyond the effects of the auto enrollment program.

“The findings of this paper indicate that while automatic enrollment is likely to achieve the goal of increasing pension coverage, it might also work against the principal goal of increasing retirement savings,” according to the research. “The prospect of lower match rates may not only reduce employer contributions to workers’ retirement accounts, but some research suggests that lower match rates might also lower workers’ own retirement contributions.”

After studying 2007 Form 5500 statistics and other data from mostly large plans, the researchers found that 93% of those without auto enrollment offer a match while 82% of those auto enrolling participants had a match. The mean match rate was 47% for plans without auto enrollment and 34% for plans with the feature.

Between 1993 and 2007, agriculture, mining, and construction industries offered the highest match rates (58%) followed by retail trade (57%), and financial, insurance, and real estate industries (54%). Manufacturing and wholesale trade industries averaged match rates between 48% and 49%. Transportation and public utilities, and other services offered the lowest level of match rates (37% and 41%, respectively).

The researchers demonstrated their conclusion by studying the plan dynamics in a hypothetical firm of 1,000 employees in which every worker earns $50,000 and which offers a match of 50% up to the first 6% of contributions (participants contribute 6%). Before the company adopts auto enrollment, the participation rate is 49%. The researchers said the hypothetical employer’s cost of offering the match is $735,000 per year (1,000 employees x 49% participation rate x 50% match rate x 6% contributions x $50,000) and the total labor cost is $50,735,000 ($50,000 x 1,000 + cost of the match).

After the firm adopts automatic enrollment, participation increases from 49% to 86%. The increase in participation increases the match cost by 76% to $1,290,000 and total compensation by 1.1% to $51,290,000, the study found.

Overall, the study looked at 826 plans from 532 employers that hold about half of the total 401(k) assets and account for about 30% of total participants.

The study report is available here.