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Portfolio > Alternative Investments > Hedge Funds

Hewitt Says Automatic 401(k) Enrollment May Hurt Some Participants

By Staff Writer

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NU Online News Service, July 11, 3:33 p.m. – Hewitt Associates L.L.C., Lincolnshire, Ill., says employees who are automatically enrolled in their employers’ 401(k) plans may end up contributing too little and choosing investment options that are too conservative.

The benefits consulting firm worked with researchers from the University of Chicago and Harvard University to look at the actual investment behavior of 100,000 workers at three companies who were eligible to join their employers’ 401(k) plans.

The researchers compared the behavior of employees at units before employees were enrolled automatically and after automatic enrollment programs were introduced.

Employees who wanted to get out of 401(k) plans at companies with automatic enrollment programs had to take active steps to opt out.

When employers set up automatic enrollment programs, they usually set employee contribution rates at 2% or 3% and put the contributions in money market funds, stable value funds, or other low-risk, low-return investments.

The researchers studied employees at one company two years after the company had introduced an automatic enrollment program.

Only 2% of the employees who had actively decided to join the 401(k) plan, before the automatic enrollment program was started, were contributing the default amount and keeping all tassets in money market founds.

Meanwhile, 39% of the employees who joined the plan through the automatic enrollment program were contributing the default amount and parking all assets in money market funds.

Researchers also found that, although automatic enrollment programs greatly increased participation rates for new employees, automatic programs had a smaller effect on participation rates for employees who had been with the companies for three years or longer.

Automatically enrolled employees were also more likely to take cash distributions when they left their jobs rather than rolling assets into other retirement plans, the researchers found.

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