Automatic enrollment is often expected to increase employer compensation costs as previously unenrolled workers start to receive matching retirement plan contributions, but researchers have found this not to be true.
Using cross-sectional variation in plan features and costs, derived from the National Compensation Survey, researchers Barbara A. Butrica, from the Urban Institute, and Nadia S. Karamcheva, from the Urban Institute and the Institute for the Study of Labor (IZA) in Bonn, Germany, found no evidence that total compensation costs or DC plan costs differ between firms with and without automatic enrollment. This is the case even though automatic enrollment is associated with a seven percentage point higher plan participation rate.
The research reveals that plans with the automatic enrollment feature offer on average 0.38 percentage point lower maximum matches to their employees. Given an average wage of $26.20, average participation rate of 68.7%, and an average maximum match of 3.2% in the study sample, the researchers calculated that the 0.38 percentage point lower match rate translates into a savings of roughly seven cents per labor hour. They note that this offsets the additional costs of 6.5 cents resulting from higher participation rates.
The research also showed employers with auto-enrollment plans are setting the default contribution rate well below the rate needed for the maximum match. “This allows them to contribute to the accounts of more workers without necessarily increasing their costs. Our findings suggest that employers might be doing exactly this,” the researchers say in their report. However, they note that more information about the actual employee contributions and how they differ from the defaults is needed in order to quantify correctly the contribution of this factor to the total difference in costs.
The researchers hypothesize that if automatic enrollment increases productivity, either directly by affecting the production function and resulting in a positive marginal revenue or cost savings or indirectly by increasing the marginal product of labor, then some of the gains might be passed to employees in the form of higher employee compensation—further adding to the increase in total compensation costs associated with automatic enrollment. However, since they found no evidence that total compensation costs differ between firms with and without automatic enrollment, they concluded that firms might be lowering their maximum match rates and default match rates enough to completely offset the higher costs of automatic enrollment.
The research report, “Automatic Enrollment, Employer Match Rates and Employee Compensation in 401(K) Plans,” is available on the Social Science Research Network website.