Urban Institute researchers Mauricio
Soto and Barbara A. Butrica, who did the study for the Center for Retirement
Research at Boston College, found that the employers with auto enrollment had
match rates about 7% below their non-auto enrolling counterparts.
Further, the study
finds that a match-rate cut by 7% would offset at least 42% of cost increases
related to auto enrollment in plans with a participation rate of at least 60%
before instituting the auto enroll feature. A plan with a 60% participation
rate before automatic enrollment would need
to reduce the match rate from 50% to 42.9% to offset a 10 % increase in
participation, the researchers say.
A key concern, according to
Soto and Butrica, is whether some sponsors might actually view employer matches in
an auto-enroll environment as an unacceptably high corporate expense. They point out that the impact of a match on participation has been shown to be
relatively modest beyond the effects of the auto enrollment program.
“The findings of this
paper indicate that while automatic enrollment is likely to achieve the goal of increasing
pension coverage, it might also work against the principal goal of increasing retirement savings,” the
two researchers write. “The prospect of lower match rates may not only reduce
employer contributions to workers’ retirement accounts, but some research
suggests that lower match rates might also lower workers’ own retirement
contributions.”
After studying 2007
Form 5500 statistics and other data from mostly large plans, the researchers
found that 93% of those without auto enrollment offer a match while 82% of
those auto enrolling participants had a match. The mean match rate was 47% for plans without
auto enrollment and 34% for plans with the feature.
Between 1993 and 2007,
agriculture, mining, and construction industries offered the highest match
rates (58%) followed by retail trade (57%) and financial, insurance, and real
estate industries (54%). Manufacturing and wholesale trade industries averaged
match rates between 48% and 49%. Transportation and public utilities, and other
services offered the lowest level of match rates (37% and 41%, respectively).
The researchers demonstrated their conclusion by studying the plan dynamics in a hypothetical firm
of 1,000 employees in which every worker earns $50,000 and which offers a match
of 50% up to the first 6% of contributions (participants contribute 6%). Before
the company adopts auto enrollment, the participation rate is 49%. The
researchers said the
hypothetical employer's
cost of offering
the match is $735,000 per year (1,000 employees x 49% participation rate x 50%
match rate x 6% contributions x $50,000) and the total labor cost is
$50,735,000 ($50,000 x 1,000 + cost of the match).
After the firm adopts
automatic enrollment, participation increases from 49% to 86%. The increase in
participation increases the match cost by 76% to $1,290,000 and total
compensation by 1.1% to $51,290,000, the study finds.
Overall, the study looked at
826 plans from 532 employers that hold about half of the total 401(k) assets
and account for about 30% of total participants.
The study report is available here.