Benefits July 18, 2000

AUTO-PILOT – Automatic Enrollment Not Enough to Overcome Inertia

July 18, 2000 (PLANSPONSOR.com) - While automatic 401(k) plan enrollment increases employee participation, those participants often leave their investments on "auto-pilot", failing to maximize the benefits of participation, according to a new study by Hewitt Associates.

Reported by

Nevin E. Adams

“It’s clear that automatic enrollment positively impacts overall participation rates,” says Lori Lucas, defined contribution consultant, Hewitt Associates. “However, our research indicates that participants have a strong tendency to remain at the company’s default elections, which typically involve low contribution rates and conservative investment funds. By doing this, participants may be cheating themselves out of significant retirement savings.”

Automatic enrollment involves automatically signing eligible employees up for a company’s 401(k) plan unless they specifically decline to participate.

The Study

The study, released by Hewitt Associates, in conjunction with faculty and researchers from Harvard University and the Wharton School of the University of Pennsylvania, compared the actions of some 53,000 eligible employees hired before and after automatic enrollment was implemented at two US companies over a one to two year period.

Both companies automatically enrolled participants in conservative, stable value investment funds, at a 2-3% contribution rate.

At both companies, automatic enrollment had a noticeable impact on participation, which increased 12% at one company and 7% at the other. It also virtually eliminated the participation gap between high- and low-wage employees.

Significantly, participation levels remained high a year later. Those subject to automatic enrollment participated at a 97% and 96% rate at the two companies, compared with rates of 52% and 47% prior to the change in practice.

Leaving “Well Enough” Alone?

However, while participation flourished, participants appeared to leave the initial, conservative elections unchanged even after a year.

Nearly 2/3 of those at both companies continued to contribute at the default rate, and more than half left the initial investment selections unchanged.

The research indicates that automatic enrollment has the greatest impact on shorter tenure, younger and lower-paid workers. “Plan sponsors should also consider that employees may be viewing the default elections as cues from the company about the appropriate contribution rate and investment fund. Clear communication about this is key,” according to Lucas.

The results of the study are expected to be referenced by Treasury Secretary Lawrence Summers, at a public address with the Department of Labor on July 18.