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Update: 401(k) Auto Enrollment Not Shrinking Matches

A preliminary report from the Employee Benefit Research Institute (EBRI) concludes that large firms that have recently adopted auto enrollment in their 401(k) plans have not typically reduced their matching contribution rates. In fact, according to the EBRI report, large firms with 401(k) auto enrollment have, on average, slightly increased their matching contribution rates.

That's great news. It's also a 180 from an Urban Institute 401(k) auto enrollment study I reported on last month that raised an unintended consequence of auto enrollment: plan sponsors were reducing their matching contributions because they now had to cover more employees.

So what gives? Well, EBRI says it's mostly about the quality of the data used by the Urban Institute. I'll let EBRI explain:

  • The [Urban Institute] study was based on U.S. Department of Labor Form 5500 data that does not include specific information on 401(k) match rates. Instead, the authors constructed an estimate for the match rate as the ratio of employer-to-employee contributions for each 401(k) plan.
  • They merged the Form 5500 data with information on automatic enrollment from the Pensions & Investments database of the top 1,000 pension funds, which includes a flag indicating whether plan administrators reported offering automatic enrollment in their defined contribution (401(k)-type) plans. However, this database does not report the year that the automatic enrollment provision was adopted, so there is no way to tell from this data source how long auto-enrollment had been implemented in a plan.
EBRI picked up the ball and dug into actual plan data for 225 large 401(k) plans that did not have auto enrollment in 2005 (the last year before the 2006 Pension Protection Act spurred a big increase in auto enrollment) but did offer it in 2009. EBRI found that that among those big firms, not only did the match not fall, it actually rose slightly. (A full report is due next month.)

That's encouraging news. There's no question the adoption of auto enrollment is an important development in helping Americans do a better job saving for retirement. Thanks to EBRI we now know match rates aren't taking a hit (at least at large firms, on average.)

That just leaves me with one major auto-enrollment issue I'd like to see addressed soon: Encouraging the firms that have adopted auto enrollment to now move on to v 2.0 and add an auto escalation feature. Right now most sponsors that have adopted auto enrollment tend to set a static rate of less than 4 percent of salary. That might make sense as a start point -- it's low enough not to scare off new participants -- but it's not a sufficient rate over the long term. With auto escalation the initial contribution rate is increased by a set amount on an annual basis -- typically one percentage point a year -- until the employee's contribution rate hits a predetermined level; 10 percent of salary is considered a base "correct" amount to aim to save. Auto escalation is an important next-step nudge that should be added to all 401(k) plans. Pronto.

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