The shift from defined benefit (DB) plans to defined contribution (DC) plans has left many Americans with the possibility of having unanchored retirements. The transition to contributing to and planning for one’s retirement has not been easy, resulting in inadequate retirement plans, even by diligent savers with the best intentions and woefully underfunded plans by those who take a lax approach to planning.
In order to ameliorate the underfunded retirement crisis brewing in America, automatic-enrollment (auto-enrollment) began to gain steam in the late 1990s. The trend, which was then bolstered by the Pension Protection Act of 2006, automatically enrolls employees in 401(K) plans forcing them to actively opt out rather than actively opt in.
Recently, the Center for Retirement Research (CRR) at Boston College concluded that although auto enrollment polices may boost the retirement savings of workers that would have never contributed at all, they could hinder the savings of those who would have been conscientious contributors due to low employer match rates and low default contribution rates.
The study, which utilized 2010/2011 restricted data from the National Compensation Survey (NCS) conducted by the U.S. Bureau of Labor Statistics, sought to examine how employer behavior under auto enrollment impacted employees’ retirement savings.
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The CRR found through the samples attained, that auto-enrollment plans do in fact foster higher participation rates. Auto-enrollment plan participation rates were a full 10 points higher than plans without them — 77 percent to 67 percent.
Because most employers match a certain percentage of their employees’ contributions, with all things equal, higher enrollment activity would translate to higher total compensation costs for employers. It is the methods in which employers apply to mitigate and alleviate these higher costs that can in turn impact the health of their employees’ plans.