Why Companies Use Automatic 401(k) Enrollment

Typically only new hires are automatically signed up for 401(k)'s.

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Automatically signing up all employees up for a 401(k) account generally gets more people to save for retirement. Almost half (42 percent) of 401(k) plans currently automatically enroll workers, according to a new AARP and Woelfel Research survey of 806 large private sector employers offering 401(k) plans. Some companies (28 percent) also automatically escalate employee contributions. The most common default savings rate is 3 percent of pay.

[See How Automatic Enrollment Affects Your 401(k) Match.]

The majority of employers with automatic enrollment (58 percent) sign up only new hires. Just over a third of companies also automatically sign up all non-participating existing employees who are eligible for the plan. Companies say they automatically enroll workers in retirement accounts to help employees save more for retirement (74 percent), in order to pass nondiscrimination testing (49 percent), and to demonstrate that they are a socially responsible company (35 percent).

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

Employees at companies with automatic enrollment who don’t want to participate in the 401(k) typically need to opt out only once (80 percent). However, some companies require non-participants to opt out annually (11 percent) or have other opt out timelines (6 percent). Employers that offer a 401(k) match are more likely than those without one to require employees to opt out just one time.

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Companies without automatic enrollment say they are concerned that employees would not like automatic enrollment (30 percents), apprehensive about additional costs (20 percent), or content with the status quo (14 percent). About 16 percent of employers without automatic enrollment say they are likely to add the feature in the next year and 11 percent plan to implement automatic escalation. Among companies currently automatically enrolling only new hires in the 401(k), 10 percent plan to expand automatic enrollment to existing employees this year.

Tell us, should all employees be automatically signed up for 401(k)'s?