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Retirement Planning > Saving for Retirement

GAO Uncertain About Auto Enrollment

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The U.S. Government Accountability Office makes no recommendations in a report about the performance of the 401(k) plan automatic enrollment feature.

The feature appears to increase plan participation, but it may not be suitable for all plan sponsors, GAO officials conclude in a 401(k) automatic enrollment review prepared for Sen. Herbert Kohl, D-Wis., chairman of the Senate Special Committee on Aging.

Today, about 16% of U.S. workers could participate in an employer-sponsored retirement plan but are not doing so, according to Congressional Research Service figures cited by the GAO.

In an effort to increase participation in 401(k) plans and similar types of plans, Congress included provisions that encourage use of automatic enrollment features in the Pension Protection Act of 2006.

The percentage of plans using auto enrollment features seems to have increased to 16% this year, from 1% in 2004, Barbara Bovbjerg, a GAO director, writes in a letter to Kohl summarizing the GAO’s findings.

Some studies suggest that auto enrollment features can increase plan participation rates to as high as 95%, Bovbjerg notes.

One challenge is that the features might be bad for employees at restaurants and other employers with high turnover rates, Bovbjerg writes.

A representative for one high-turnover employer told the GAO that administering an auto enrollment option would create administrative headaches.

In addition, “even with contribution rates of 6%, low-wage and short-tenure staff would accumulate very small balances and likely abandon them or take a lump-sum distribution upon separation,” Bovbjerg writes.

Moreover, just as the stock market was about to crash, many companies that adopted auto enrollment features chose target-date funds – funds that invest in a mix of stocks and bonds, and are supposed to shift more toward bonds as employees age – as the default investment alternative for plan participants who failed to make active investment choices.

Federal regulators took active steps before the crash to discourage employers from using fixed-rate vehicles, such as stable value funds, as the default investment options, contending that fixed-rate options would expose plan participants to too much inflation risk.

The Employee Benefit Research Institute, Washington, found earlier this year, for example, that, in 2007, “except for participants in plans with more than 10,000 participants, more than 90% of those automatically enrolled in TDFs had all of their allocation in such funds,” Bovbjerg writes.

Although TDFs are supposed to become more resistant to stock market price fluctuations as participants near retirement age, the TDFs do not always work that way, Bovbjerg writes.

“As a result of the 2008 stock market decline, some TDFs designed for those expecting to retire in or around 2010 lost 25% or more in value,” Bovbjerg writes.

A U.S. Department of Labor advisory panel has recommended that the department provide more specific guidance regarding TDFs, and give plan fiduciaries more advice about how to select and monitor TDFs, Bovbjerg writes.

Another challenge is that many workers automatically enrolled in retirement plans might have relatively low incomes and might not enjoy the same level of tax benefits that workers who take active steps to enroll typically enjoy, Bovbjerg writes.

But finding out how the automatic enrollment features really work could be helpful to developing and improving other proposals for increasing U.S. workers’ retirement savings rate, Bovbjerg writes.

A copy of the GAO report is available here.


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