Automatic Enrollment - Not The End, A Great Beginning

The July 7 Wall Street Journal article suggesting that the decline in the average 401(k) participant savings rate is the result of companies recently implementing automatic enrollment (AE) misses the bigger picture. It may be a minor contributing factor, but the principal reason for that decline has been the economy. The match matters. Companies forced to suspend or reduce their 401(k) match experienced a decline in participation and participant deferral rates. Income and day-to-day expenses matter. 401(k) participants are confronted with higher costs for food and gas at a time when their incomes are growing slowly, if at all. It’s no surprise that some are saving less.

So what about AE? For most workers, if there is no workplace retirement saving, there will be no retirement income other than Social Security. Realizing this, some companies with significant non-participation, especially those under age 30, implemented AE for their new hires. A few have gone so far as to automatically enroll even current non-participating employees. The results have been gratifying. Less than 5 percent of those automatically enrolled are opting out. This is real progress.

It is true that some automatically enrolled participants are contributing at a lower rate than they would have had they voluntarily elected to participate in their 401(k) plan. Employers know this and are taking action. First, even after the implementation of AE, they continue their efforts to persuade their 401(k) participants to save more. Companies with AE don't just want 401(k) participation; they want employees to save adequately.

Second, according to PSCA's most recent survey, 40 percent of companies with AE were automatically escalating the deferral percentage for automatic enrollees, and another 13 percent of these companies were permitting employees to elect to voluntarily escalate from the original AE deferral rate. And, at many of these companies, the escalation does not stop at the amount necessary to get the full match. Approximately half permit the automatic escalation to exceed 6 percent. Fifteen percent permit escalation to the maximum dollar limit.

As employers re-employ their matching contributions, and they are, and worker incomes begin to increase, the overall 401(k) savings rate will eventually exceed historically normal levels because AE will have delivered higher participation rates. Those automatically enrolled will either voluntarily or automatically be saving at rates significantly higher than the typical initial rate of 3 percent. AE is not “set it and forget it.” It’s a great beginning.