How does an employer achieve auto enrollment for its 401(k) plan?
Congress approved Automatic Contribution Arrangements (ACAs) with simplified requirements that encourage adoption of Defined Contribution Plans such as 401(k) retirement plans having an automatic enrollment default built into the plan’s design.
The employer may introduce automatic enrollment feature(s) in its existing vehicle or the employer can adopt a new automatic 401(k) plan. Fiduciary obligations to make sound business decisions for the benefit of plan participants solely must be followed.
With this impetus to overcome apathy, inertia, procrastination, fear, or reluctance to invest, Vanguard Investments studied the impact of participants being automatically enrolled in their company’s 401(k) plan.
Per US News Money , 24 percent of 2010 Vanguard 401(k) plans included auto enrollment. Hewitt found 36 percent of mid-size and large U.S. companies without automatic enrollment say they are likely to begin automatically enrolling new employees this year.
Are Automatic Plans working for Low Income Minorities?
Yes, per Vanguard Investments research of its 2010 Auto Enroll 401k Plans for over 250,000 employees within seven major plans, use by low income, Black, and Hispanic groups is successfully on the rise. The push for participation behind these increased numbers is introduction of auto enroll features:
Up 60% for Black employees (risen from 57% to 94%)
Up 40% for Hispanic groups (risen from 67% to 95%)
Study findings about default rates among low-income Blacks and Hispanics?
1) They now participate due to auto enrollment versus self-enrollment solely.
2) Blacks earning less than $30,000 per year now participate at 93 percent instead of a previous 35 percent.
3) Hispanic groups earning similarly jumped from 36 percent to 94 percent.
How about other employee population groups?
Other employee groups or classifications also rose. The participation growth due to auto enrollment is across the board.
Plan design featuring automatic enrollment does reduce participation disparities previously seen among racial and ethnic groups by increasing the rate of overall participation regardless of classification.
Whites and Asians typically opt for higher contribution rates than the normally standard 401k plan default rate of 3 percent of earnings. Automatic enrollment does not push employees to increase their savings rate beyond the default level.
Whites and Asians are more likely to aggressively opt for equity funds.
Whites and Asians average 0.5 to 2 percentage points higher in contribution rates than blacks and Hispanics.
If an employer has concerns about disparities in participation of 401k benefits among its employees, as a plan sponsor they should give serious consideration to an auto enrollment feature in their Defined Contribution or 401(k) plan.
A 1.2 million 401(k) participant study by Mercer found auto enrolled employees’ average savings rate in 2010 was 3.5 percent. Voluntary, or self-enrolled, employees savings was 8.5 percent. “Those who self-enroll and set their own contribution rate are contributing nearly two and half times those who are automatically enrolled,” says Dave Tolve, U.S. retirement business leader for Mercer’s outsourcing business.”
If you need participation to be up, consider auto enrollment; if you need savings rate to be up consider other strategies too.