Company Match No Help in Retaining Auto Enrolled Employees

Employers who have turned to auto enrollment to boost 401(k) participation should not rely too heavily on their company match to help keep employees from opting out.

That was the key conclusion of the study “The Impact Of Employer Matching On Savings Plan Participation Under Automatic Enrollment” by researchers James J. Choi of Yale University and John Beshears, David Laibson and Brigitte C. Madrian of Harvard University. The research was performed for the National Bureau of Economic Research (NBER).

“The success of automatic enrollment at increasing participation in employer-sponsored savings plans does not appear to rely much on having an employer match,” the university researchers wrote. “…automatic enrollment participation rates are positively related to match generosity, but the magnitude of this effect is modest.”

The four researchers explained that they wanted to see what effect changes in a plan sponsor’s matching contribution would have on the number of employees who took the option to back out of an auto-enrolled plan.

Choi, Beshears, Laibson and Madrian studied the issue in two settings:

  • an unidentified “large firm” referred to only as “Company A’ that had adopted auto enrollment. The employer dropped its 25% on the first 4% of pay match and started a non-contingent contribution of 4% of pay plus an annual profit-sharing contribution that did not depend on the employee’s contributions.
  • pooled data from nine auto-enrolled firms.

According to the study, among new hires with six months of tenure in the firm that went from a match to a non-contingent contribution, participation rates decreased by at most 5% to 6% after the firm eliminated the match and overall average employee contribution rates fell by 0.65% of pay.

Among the nine firms, decreasing the match amount by 1% of pay was associated with a 1.8% to 3.8% decrease in participation rate at six months of eligibility, the researchers found.

“Collectively, these results imply that moving from a typical matching structure of 50% on the first 6% of pay contributed to no match at all would reduce savings plan participation under automatic enrollment by 5 to 11 percentage points,’ the study said. “In this specification, decreasing the maximum employer match by 1% of salary is associated with a plan participation reduction at six months of eligibility under automatic enrollment of 2.8 percentage points.’

More information about ordering a copy of the full study is here.