The United Kingdom has recently completed a nationwide phased rollout of a requirement that employers automatically enroll employees into a retirement plan, with the ability to opt out, and researchers from the Center for Retirement Research at Boston College say the results provide lessons for the United States.
Following the UK’s initiative, participation rates have jumped to around 90% at medium and large employers (those with 58 or more workers), 74% at employers with 50 to 57 employees, 67% at employers with 30 to 49 workers and 70% at smallest employers (two to 29 employees). For the smallest employers, participation under auto-enrollment was slightly higher for women, higher earners, workers younger than 40, and those who had worked for their employer longer. The researchers say some evidence indicates that, at least in part, the lower participation rates at smaller employers are due to less generous employer contributions, which appear to increase the likelihood of opting out.
The Center for Retirement Research Issue Brief notes that U.S. retirement plan participation rates were flat between 2012 and 2016, hovering just under 50% overall, In contrast, due largely to the new auto-enrollment policy, participation in the UK soared from 33% to 67%. The differences by employer size are interesting. For very large employers (500 or more workers), the UK participation rate was still slightly lower than the U.S. rate in 2016 while, for employers with fewer than 500 workers, the UK participation rate flipped from being much lower than the U.S. rate to much higher. “This pattern suggests that an equivalent reform in the United States could generate a sizeable increase in retirement plan participation, primarily among employers with fewer than 500 workers,” the researchers conclude.
The report notes that the adequacy of retirement saving will ultimately depend on how much is saved—not just whether employees are participating in a plan. Under the UK policy, contributions to the plan in the 2016 financial year had to be at least 2% of earnings between £5,824 ($7,600) and £43,000 ($55,900), of which at least 1% had to be an employer contribution. The minimum contribution rates were increased in April 2018 and are rising again in April 2019. The research finds that while most of the participation increase is among workers making the minimum default contribution, the share contributing at higher rates has also risen significantly.
For example, for the smallest employers, the share of employees contributing 5% to 10% of earnings rose by 4 percentage points, while the share contributing more than 10% rose by 6 percentage points. These findings also apply to medium and large firms. The exact mechanism behind the increase in the share of workers contributing at higher levels is not clear, but the researchers says one strong possibility is that some firms are enrolling their employees automatically in plans with contributions that are much higher than the minimums, potentially in plans that were already available before the auto-enrollment mandate went into effect but had low participation rates.
The UK chose to require re-enrollment every three years, in addition to whenever an employee moves to a new employer. Given the gradual phase-in of the UK policy, in April 2016 all workers at firms with 30,000 or employees who opted out of the initial auto-enrollment were re-enrolled. The analysis found that re-enrollment—at least to date—does not seem to have boosted participation any further. “This finding suggests that workers who choose to opt out when first enrolled also choose to opt out when re-enrolled three years later,” the researchers conclude.The full Issue Brief may be downloaded from here.