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News from, September 7, 2011
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Automatic Enrollment Sparks Debate

On July 7th, The Wall Street Journal published an article entitled, "401(k) Law Suppresses Savings for Retirement." The article maintains that the 2006 law allowing the automatic enrollment of employees in 401(k) plans is failing to boost employee retirement savings for some participants. A Journal analysis shows that about 40 percent of the new hires at companies using automatic enrollment were saving less than "they would if left to enroll voluntarily.” According to the article, the reason for the lower level of participation is that more than 2/3 of plans with this feature set the automatic contribution rate at 3 percent of compensation, or less. The Journal notes that is far less than the 5-10 percent that "participants typically elect when left to their own devices.” Even so, the article acknowledges that automatic enrollment "has successfully prodded millions of people who wouldn’t have saved a penny for retirement to start saving something.” It also noted that companies using automatic enrollment have average participant rates above 85 percent, compared with 67 percent in plans without that feature. The story seems to indicate that plans using automatic enrollment have reduced their efforts to encourage participation. The plans seem to be on an autopilot.

This article prompted almost immediate commentary regarding the pros and cons of automatic enrollment. Among those commenting negatively on the article was the Employee Benefit Research Institute, the group who prepared the study, quoted in the article. Their response is entitled "What Do You Call a Glass That is 60-85% Full?” EBRI comments that while the article said that automatic enrollment is reducing savings for some participants, it failed to mention that automatic enrollment is "increasing savings for many more – especially the lowest-income 401(k) participants.” EBRI notes that the "entire point’ of its study for The Wall Street Journal was to determine "how valuable the proper choice of plan design and worker education can be.” It criticized the Journal for reporting "only the most pessimistic set of assumptions” and not citing any of the other 15 combinations of assumptions reported in the study. EBRI argued that the article did not report the positive impact of automatic enrollment on many workers.

According to EBRI, its "simulation results” using in the study showed that about 60 percent of workers would be better off in an automatic enrollment plan as opposed to similar participants covered under a plan without such a provision. That percentage of participants increases to 85 percent for the plan that includes automatic escalation provisions. EBRI acknowledged that as with any change, some people will not have the desired results. Where the focus of automatic enrollment is to increase participation among lower-income participants, "objective analysis suggests auto-enrollment does obtain that goal.”

Reprinted with permission from 401(k) Advisor

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