Do 401(k) plans positively impact employee retirement savings? Let the statistics speak for
“According to the Employee Benefit Research Institute (EBRI), more than 70% of employees earning between $30,000 and $50,000 participate in a 401(k) plan when it is offered to them at work, while fewer than 5% of those same employees save on their own in an IRA when they are
not covered by a workplace retirement savings plan.”i Such a startling difference in outcomes is attributed to the convenience of payroll deduction of a 401(k) plan, the culture of savings that such a plan creates, and, frankly, the inertia of employees—once enrolled they tend to stay enrolled in the 401(k) plan.
But what about the 30% that don’t enroll in the 401(k) plan?
Adding an Auto‐Enrollment option can boost the 401(k) participation rate from 70% to 90% or more.
How does AutoEnrollment work?
401(k) plans must give employees the choice to participate‐it cannot be a mandatory election. However, two approaches can be taken. Employees can be given the option to enroll in the 401(k) plan or they can be automatically enrolled and given the option to opt out. If the Auto‐Enroll feature is properly structuredii, all 401(k) deferrals can be returned to the employee who opts out of the 401(k) plan, if requested by the employee within 90 days of the initial enrollment.
Why does AutoEnrollment work so well?
Statistically, Auto‐Enrollment will boost your 401(k) participation rate to 90% or more because the employees’ inertia is now working to their advantage. The same employee who may have never gotten around to enrolling in the 401(k) plan is probably not going to get around to un‐enrolling either.
Auto‐Enrollment is growing in popularity. Now almost 50% of the 401(k) plans in the United States have implemented Auto‐Enrollment features. Within the manufacturing industries, almost 70% of the 401(k) plans now have Auto‐ Enrollment.
But, 90% of 401(k) plans with Auto‐Enrollment can improve what they are already doing. When automatically enrolling employees into their 401(k) plan, 90% choose an employee deferral rate of less than 6% of pay, and half choose a rate of 3%iii. Yet, studies show that the same 10% will opt out of the Auto‐Enroll provision whether the default deferral rate is 3% of pay or 6% of pay.iv
When choosing to add Auto‐Enrollment, go for the “gusto”; choose 6% of pay, or better yet, 6% of pay with automatic 2% increases each year, capped out at 10% of pay. Down the road, when that 30% of your employees, who otherwise would have had no retirement savings, suddenly realize they can actually retire, they just may thank you...or not. But, you know you did the right thing.
i Brian Graff, CEO, ASPPA and NAPA, “Inside the Beltway” article in NAPAnet, the magazine, Winter edition
ii Auto‐enrollment requires certain 401(k) plan amendments and timely employee notices. It is important that the 401(k) plan sponsor obtain competent ERISA advice before implementing such a change.
iii 56th Annual Survey, Profit Sharing Council of America, page 63.
iv The Importance of Default Options for Retirement Savings Out‐Comes: Evidence from the United States, by Jeffrey Brown, et al, University of Chicago Press.