In the five years since the Pension Protection Act was passed, the use of automatic enrollment in retirement plans has increased from 16% of participants to over 50%, Fidelity found in an analysis of the firm’s retirement plans. Furthermore, the percentage of plans that default participants into age-based lifecycle funds leapt from 11% to 73%.
The average participation rate in plans without automatic enrollment, according to Fidelity, is 55%. Adding an auto-enrollment feature increases the average participation rate to 82%.
“The PPA is proving to be one of the most significant legislative initiatives helping American workers save for retirement,” James MacDonald, president of workplace investing for Fidelity Investments, said in a statement.
MacDonald noted that younger workers are most impacted by the PPA. “The auto features have significantly boosted participation among younger workers and have simplified the investing process, giving them a solid start to investing for the future.”
Indeed, the difference in participation rates among young participants in plans with auto-enrollment and without it is dramatic. Just 20% of eligible employees between 20 and 24 participate in plans without automatic enrollment. That number increases to 76% in plans with the feature.
Lifecycle funds have also proved their popularity with almost three-quarters of sponsors offering them as the default option. Additionally, 16% of total 401(k) assets are invested in lifecycle funds.
The percentage of participants invested in appropriate lifecycle funds increased from 26% to 42%. Here again, young investors show that they stand to gain the most from lifecycle funds as 63% are invested in the appropriate lifecycle fund for their age.
While participation in Roth 401(k)s remains low, the PPA’s allowance for Roth 401(k) deferrals has led to an increase in plans offering them from 4% to 31%. Participation has doubled over five years to 6%.