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Automatic 401(k) enrollment increases employee participation

Escalating contributions rising among employers

401(k) Enrollment

For at least a decade, employers offering 401(k) and other defined contribution retirement plans have shared a basic frustration.

Even when employers make significant matching contributions, a high percentage of employees — typically 25% to 30% — do not participate.

In many cases, inertia is the principal reason why employees don't contribute. When asked to enroll, they often don't respond.

“Employees can be lethargic,” said Robyn Credico, defined contribution plan practice leader with Towers Watson & Co. in Arlington, Va.

A growing number of employers, though, have offset that with a simple change in plan design: Employees who don't respond to enrollment notices are automatically enrolled in the 401(k) plan, unless they object.

More than 60% of employers surveyed by Aon Hewitt now have an automatic 401(k) enrollment feature, up sharply from 24% in 2006.

The effect on employee participation is dramatic, employers say.

For example, in 2008 about 58% of eligible employees participated in North Shore LIJ Health System's 403(b) plan. That year, the Lake Success, N.Y.-based health care system added automatic enrollment to the 403(b) plan, the nonprofit sector's equivalent of 401(k) plans.

Immediately, the 403(b) plan participation rate shot up to 88% with the participation rate since then remaining in the mid- to high 80% range, said Dijana Predich, director of benefits strategy and retirement administration.

While there was some trepidation by senior management prior to adding automatic enrollment, “There was no noise. In fact, some employees thanked us, saying they didn't have the time” to focus on enrolling in the plan, Ms. Predich said.


North Shore-LIJ's experience is not unusual. “With automatic enrollment, you can get a participation rate in the 90s. The reality is automatic enrollment has increased the participation levels in 401(k) plans,” said Caren Bianco, a director at PricewaterhouseCoopers L.L.P. in New York.

For younger employees, the difference is especially striking. The average participation rate among eligible employees ages 20 to 24 in plans with automatic enrollment was 76% vs. 20% in plans lacking the feature, according to a 2011 Fidelity Investments study.

Failure to enroll and contribute to 401(k) and other employer-sponsored retirement savings plans has consequences. Employees who do not contribute and lose out on an employer match face the likelihood of not having enough savings to retire at a normal age, resulting in employers not having the turnover they need to hire new employees.

And the growth in the number of employers that have frozen their defined benefit plans increases the possibility employees will lack sufficient savings to retire if they don't participate in their employers' 401(k) plans.

“For many employees, a 401(k) is the only retirement plan they will have,” said Jeanne Thompson, a vice president with Fidelity Investments in Boston.

When implementing automatic enrollment, employers have other decisions to make. The biggest: deciding what percentage of employees' annual salaries will be deferred and whether an automatic escalation feature will be added until it hits a company's set cap.

Automatic escalation of employees' contributions has become the norm. Last year, 71% of employers with automatic enrollment programs used automatic escalation vs. 50% in 2009, according to a Towers Watson & Co. survey.

“Automatic enrollment is a good way to get employees to begin to contribute, but it is not to enough” to ensure the continued growth of retirement plan savings, said Dave Tolve, a partner in Mercer's L.L.C.'s Norwood, Mass., office.

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