What happens when a national government requires all employers to auto-enroll workers in a retirement plan?
That’s what the U.K. did, beginning in October 2012, starting first with large employers, and eventually extending the requirement to the smallest, with fewer than 30 employees in February 2018, in an effort to boost retirement savings.
The result: “an enormous increase in the share of private-sector employees … saving in a workplace retirement plan,” according to an analysis by the Center for Retirement Research at Boston College. The participation rate overall more than doubled from 32% in 2012 to 67% in 2017.
There is no equivalent requirement for U.S. employers, although more employers are instituting auto-enrollment in their 401(k) plans and several states have enacted compulsory auto-enrollment programs for employers. To date, the U.K. is the only country that has completed a nationwide rollout of a policy requiring employers to establish auto-enrollment in employee retirement plans.
The U.K. plan covers employees 22 and older up to the “state pension age,” which is 65 for men and 63 for women who earn at least £10,000 per year ($13,000) and have worked for their employer for at least three months. Employees can opt out.
The Center for Retirement Research analysis found that plan participation increased the most for large and medium U.K. employers, to around 90%, and to around 70% for small employers. The lower participation rate at smaller employers may be due to less generous employer contributions, according to the center.
One of the reported shortcomings of auto-enrollment programs is the tendency for employees to contribute only the minimum the program sets, if there is no complementary auto-escalation program. (Auto-escalation is not addressed in the analysis).
But the Center for Retirement Research analysis, written by Jonathan Cribb, senior research economist at the U.K.-based Institute for Fiscal Studies, and Carl Emmerson, its deputy director, found that auto-enrollment alone can help boost the employee contribution rates somewhat.
At employers with less than 30 employees with an auto-enrollment plan, contributions of 5%-10% increased 4% and contributions over 10% rose 6%. “The exact mechanism behind the increase … is not clear. But one strong possibility is that some firms are enrolling their employees automatically in plans with contributions that are much higher than the minimums, potentially in plans that were already available before the auto-enrollment mandate went into effect but had low participation rates,” the authors write.
— Check out The 4% Retirement Rule Is Back: J.P. Morgan on ThinkAdvisor.