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You are here: Home / 401K / Auto-Enrollment Triples New Hire Participation

Auto-Enrollment Triples New Hire Participation

March 30, 2021 by Retirement

Automatic enrollment in defined contribution (DC) plans has led to a huge boost in retirement plan participation rates, according to a report from Vanguard that also found the feature leads to an increase in deferral rates over time.

“Automatic enrollment has emerged as a pivotal strategy to improve plan participation and employee saving rates in 401(k) and other DC retirement plans,” according to the report. 

The report said that under auto-enrollment, DC plan sponsors have seen participation rates among new hires more than triple to 91%, compared with 28% under voluntary enrollment. Additionally, after three years, 92% of participants hired under auto-enrollment were still participating in the plan, compared with 29% of participants under voluntary enrollment.

The report was based on a study of more than 810,000 newly eligible employees in 520 plans hired between Jan. 1, 2017, and Dec. 31, 2019, and who were still employed by the plan sponsor as of June 30, 2020. Participants in the sample skew younger, have a shorter tenure than the general participant population, and have median account balances of $6,500. All the plans in the sample selected a balanced investment strategy as the default investment, with 99% choosing target-date funds (TDFs).

Vanguard’s research found that auto-enrollment raises plan participation rates most dramatically among young and low-income workers, who have historically had very low participation rates under voluntary enrollment plans. Employees earning less than $15,000 had a participation rate of 82% under automatic enrollment, compared with just 4% under voluntary enrollment.  Likewise, nine of 10 employees younger than 25 were plan participants under automatic enrollment, versus fewer than two in 10 under voluntary enrollment.

Although lower-income workers gained the most from auto-enrollment, the study found that wealthier participants also benefited from the program. Among employees making more than $150,000 a year, new-hire participation rates were also higher under automatic enrollment than under voluntary enrollment.

Additionally, auto-enrollment raises the “floor” contribution rate in a DC plan by replacing non-contributors with participants saving generally at 4% or higher.

“Sponsors can seek to improve retirement outcomes through automatic enrollment combined with higher initial deferral rates, an automatic increase feature, and a total automatic increase cap of at least 10%,” said the report, which added that another way to improve outcomes is to extend the automatic enrollment design from only new hires to all eligible nonparticipants. “Plan sponsors should consider using the power of inertia by employing various types of sweeps, such as re-enrollment, under-saver, and automatic increase sweeps.”

Vanguard said its analysis emphasizes the importance of plan design defaults, the role of inertia in retirement savings decisions, and the impact of employer plan design decisions on retirement adequacy among DC plan participants.

“All things being equal, stronger default designs will help improve retirement outcomes because of the effect of inertia,” the report said. “Sponsors should seek to take advantage of this behavioral bias when designing their DC retirement programs.”

Related Stories:

Congress Mulls Expanding 401(k) Enrollments, Easing Retirement Fund Withdrawals

Survey Highlights Need for Auto-Enrollment in Public Sector Supplemental Retirement Plans

Virginia Legislature Passes Bill to Create State-Run Retirement Plan

Tags: 401(k), auto-enrollment, Automatic Enrollment, DC, deferral rates, Defined Contribution, Vanguard

Filed Under: 401K

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