Participation Increased Via Auto Enrollment, but Savings Rates Low

January 11, 2008 (PLANSPONSOR.com) - An analysis of about 50 plans in Vanguard's recordkeeping system that have adopted automatic enrollment suggests it does improve participation rates, but deferral rates for those using automatic enrollment remains too low to generate adequate retirement savings.

According to a report on the analysis, “Measuring the Effectiveness of Automatic Enrollment,” by the Vanguard Center for Retirement Research, new employees hired under automatic enrollment designs have participation rates dramatically higher than new employees hired under voluntary enrollment designs (86% versus 45%). Automatic enrollment raises participation rates across most demographic groups, but most significantly among low-wage and younger employees, Vanguard said.

However, overall plan contribution rates under automatic enrollment fall because many new participants who would have chosen a higher contribution rate under a voluntary enrollment plan design remain at the low-default levels. Four of 10 plans have implemented automatic enrollment designs where total employer and employee contributions are less than 9% of income after five years – a level Vanguard said is too low to generate adequate retirement savings.

The report noted that plans with automatic contribution increase features achieve much higher rates of savings.

Further adding to the problem of inadequate savings, Vanguard’s analysis found new hires in plans featuring automatic enrollment are three times more likely to allocate 100% of their contributions to the default investment fund than new hires in voluntary enrollment plans (67% versus 21%).

Employees are more likely to change plan contribution rates than plan default investments. Vanguard found that after approximately 24 months, 30% of eligible employees remain at the plan default contribution rate and 51% stayed with the plan default investment.

In the Vanguard analysis, more than 90% of plans adopting automatic enrollment implemented it for new hires only. Half of plans automatically enroll employees at a 3% deferral rate, and 22% use a higher initial rate. Half of plans have implemented automatic annual contribution rate increases of 1%. Nine in 10 plans use a life-cycle or balanced fund as the default investment.

The Vanguard report is here .

«