Auto Enrollment Working as Intended

July 14, 2009 (PLANSPONSOR.com) - A new analysis from Fidelity Investments indicates that auto enrollment in 401(k) plans is proving to have the biggest impact on younger and lower-compensated employees.

Fidelity data of auto enrolled participants in plans it administers shows that over half (52%) were between the ages 20 and 34. By comparison, only 13% of participants that were auto enrolled were between the ages of 50 and 64. The impact of auto enrollment on older participants is not as significant as many are either already participating or elect to enroll on their own, Fidelity said in a press release.

Data also showed that the majority (56%) of participants that were enrolled automatically made less than $40,000 a year. Among the participants that were auto enrolled, only 10% had higher salaries ranging from $80,000 to $150,000 a year.

“Auto enrollment is doing exactly what it was intended to do,” said Scott B. David, president, Workplace Investing, Fidelity Investments, in the press release. “It is driving many Americans who would have otherwise not saved – mostly the young and lower-paid employees – to begin saving early and consistently which is critical to having a healthy income in retirement.”

The number of Fidelity plans offering auto enrollment increased nearly 70% since the end of 2007 to 2,699 corporate defined contribution plans as of March 31, 2009. While this represents just 16.3% of 401(k) plans that Fidelity manages, nearly half of all participants are in a plan with auto enrollment as the adoption of the feature has been led by some of the largest plans.

Over 50% of plans with over 25,000 or more participants have adopted auto enrollment, compared to just 13% of the smallest plans, those with 500 participants or less. Fidelity Investments Institutional Services (FIIS) 401(k) plans were excluded from the analysis.

The analysis of workers eligible for automatic enrollment showed that only one in 10 proactively opt out of the plan. The average participation rate seen in Fidelity plans that do not use auto enrollment is about 60%, compared to 90% for plans that adopt auto enrollment for both new and existing employees.

Fidelity also found that workers overwhelmingly either accept the default deferral rate set by the employer or elect to increase it regardless of how high the rate. An analysis of plans with the most common default deferral rate of 3% showed that 57% keep that contribution rate and another 37% elect to increase it, Behavior of workers in plans with a 6% default deferral rate was not much different, with 60% opting to keep the rate and another 24% electing to increase.

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