How Automatic Enrollment Affects Your 401(k) Match

Two recent studies find conflicting results

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Automatically enrolling workers in 401(k) plans unless they take the initiative to opt out is generally viewed as a good way to get more people to save something for retirement. Signing up more workers for the plan also helps companies meet 401(k) nondiscrimination requirements meant to insure that 401(k) contributions for rank-and-file employees are proportional to retirement payouts for owners and managers.

However, when more people join a 401(k), firms that provide a match will have to spend more money on employee benefits. Companies with an eye on their bottom line might then reduce their 401(k) match to keep benefit costs the same as they were before all employees were automatically enrolled.

[See The Case Against 401(k) Automatic Enrollment.]

A new Employee Benefit Research Institute study that will be released in February quells that worry. The researchers found that many employers boosted their 401(k) match around the same time they adopted automatic enrollment. “Our recent analysis of plan-specific data shows that, at least among large 401(k) plans, plan sponsors actually increased the generosity of their contribution rates,” says Jack VanDerhei, EBRI research director and author of the report.

The EBRI analysis of 225 large 401(k) plans that adopted automatic enrollment between 2005 and 2009 found that the average 401(k) match was 4.32 percent of pay in 2009, up from 4 percent in 2005. However, many of the employers who enhanced their 401(k) match froze or closed their traditional pension around the same time. Among companies that froze their traditional pensions, the 401(k) match was increased by 1.15 percent of pay. And employers that closed their pensions to new employees boosted the 401(k) match by .66 percent of compensation.

The EBRI results contradict a Center for Retirement Research at Boston College and Urban Institute study published last month that found that 401(k) matches are 7 percentage points lower at firms that automatically enroll their workers in retirement accounts than among those with only voluntary participation. EBRI says their opposite findings are due to the estimates used and their methodology. “While the authors correctly point out that although the regressions suggest a relationship between automatic enrollment and match rates, they do not necessarily imply that auto-enrollment causes lower match rates,” EBRI researchers wrote in a statement about the Boston College and Urban Institute paper.

[See Automatic 401(k) Enrollment Could Hurt Retirement Savers.]

However, the Boston College and Urban Institute researchers stand by their results. “Automatic enrollment is not free for employers and profit maximizing firms might look for ways to offset the higher costs of auto-enrollment,” write coauthors Barbara Butrica and Mauricio Soto in a response to EBRI's paper. “How they will do that is still up for debate, but our results suggest that some employers may reduce their match rates.”

Tell us, what happened at your company when 401(k) automatic enrollment was introduced?