Auto Enrollment not the Solution to All Employee Behaviors

October 26, 2006 ( - A new Hewitt Associates breakdown of existing data confirms that auto enrollment does increase participation rates - particularly for younger, lower-salaried, and lower-tenured employees - but does not guarantee participants will contribute enough or make the best investment choices.

In its current study, using data from 120 of the plans in its previous sample, 24 of which utilize automatic enrollment, Hewitt found that p articipation rates for employees who were hired after their plans implemented automatic enrollment or who were automatically enrolled once their 401(k) implemented the feature were high regardless of age, salary or tenure – at least 86% for any category.

That was not the case for employees in a plan without automatic enrollment or employees previously at an employer who were not enrolled in the plan once auto enrollment was implemented. So automatic enrollment does increase participation rates among younger, lower-salaried, and lower-tenured workers, Hewitt’s analysis indicated.

For employees with less than one year of tenure, participation was 62 percentage points higher under automatic enrollment. Participation was nearly 60 percentage points higher for employees with an annual salary less than $20,000 under automatic enrollment. Meanwhile, for workers ages 20 to 29, participation was 45 percentage points higher under automatic enrollment, the Hewitt report said.

For the sample in general, on average, the participation rate for the automatic enrollment group was 91%, compared with a 68% participation rate for the non-automatic enrollment group. Hewitt noted that opt-out rates for those automatically enrolled were low. A 10% or less opt-out rate was common among plans.

Hewitt’s prior study also found that participation rates were higher among plans with an auto enrollment feature than for all plans in the Hewitt universe, but automatically enrolled participants mostly contributed in a nominal way to their 401(k) plans, and automatic enrollment may have contributed to a lower equity investment of 401(k) dollars in plans with the feature (See Auto Enrollment Improves Quantity, not Quality, of Participation ).

As Hewitt's earlier study indicated, while automatic enrollment gets a greater number of employees to participate in their retirement savings plan, it does not guarantee quality of savings for these participants. This is due to participant inertia in moving from the plan's default deferral rate or default investment option.

Because the majority of the plans with automatic enrollment had a default rate at or less than 3%, the average contribution rate of the automatic enrollment group was 6.8%, compared to 8% for the non-automatic enrollment group.

However, even more savings were lost when looking at how participants contributed compared to the company match threshold, Hewitt found. Forty-two percent of auto enrollees did not contribute up to the match threshold, versus 19% of non-automatic enrollees, according to the report. This problem was greater among younger and lower salary employees, with 55% of 20-29 year olds contributing below the company match threshold.

In addition, since half of the plans with automatic enrollment defaulted participants' accounts into the most conservative investment options, such as money market or stable value funds, the percentage of equity contribution of the auto-enrollment group was 48%, compared to 67% for the non-auto enrollment group. Hewitt found that many automatically enrolled participants did not change their investment option from the default option.

Further, participants contributed only 31% of their assets to equities on average when defaulted to a money market or stable value fund, while those defaulted to balanced or pre-mixed investment options contributed 67% of their assets to equities. The trend away from equities was more pronounced in the automatic enrollment group among younger, lower-salaried, and lower-tenured participants.

Participants who were automatically enrolled were also less likely to rebalance their assets (9%), than their non-automatically enrolled counterparts (18%), Hewitt found, based on 2005 data. Hewitt conceded that it is possible the auto enrolled participants were not aware of the need to rebalance.

For more information on the new report "How Do Participants Save and Invest in 401(k) Plans With Automatic Enrollment?," contact the Hewitt Information Desk at 847-771-2500 or .