Administration February 8, 2001

Auto Enrollment Choices Impact Cost, Participation

August 2, 2001 (PLANSPONSOR.com) - A new Vanguard survey of plan sponsor experience with automatic, or negative, enrollment indicates that while the practice can increase participation rates, it can increase plan costs with little corresponding benefit in the absence of the proactive involvement of plan sponsors.
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While admittedly limited in scope, the Vanguard survey audience did tend toward a 3% default deferral rate for automatic enrollment, a rate utilized, but not recommended, by the Internal Revenue Service in a recent revenue ruling on the topic. Still, unlike other studies, 25% of responding employers had chosen a default deferral rate of 4% or more.

Balanced Approach

Another significant difference in the Vanguard sample was the relatively high number (40%) that had selected a balanced or lifestyle fund as the default investment, rather than the more conservative money market or stable value option that has traditionally been the default of choice by litigation leery plan sponsors.

Still, 60% of the 15 plans in the survey had opted for the “stable” choice rather than run the risk of a participant suit based on a negative return on the automatic deferral.

The survey, based on the experience of 15 Vanguard clients who have introduced automatic enrollment for their defined contribution plans, found that plans that automatically enrolled newly eligible employees only saw participation rates rise from 74% to 84%. Those that automatically enrolled all eligible employees saw an even more dramatic jump ? from 73% to 90%.

However, the study noted that many plans undertook other improvements at the same time as the switch to automatic enrollment ? which might also influence changes in participation.

Cost Conscious

The study found that the decision to target newly eligible workers only was often cost driven, including:

  • The desire to minimize the cost of additional employer matching contributions
  • A concern that the increase in the number of small balance accounts will result in increased fees for the plan
  • A concern that a higher “opt out” rate might result from enrolling all eligible employees, creating a larger number of smaller, inactive accounts

Nearly 90% of plans in the survey gave participants a month or less to opt out of automatic enrollment, a process that was typically communicated through enrollment kits and new-hire orientation.

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