Hewitt Study Reveals Impact of Automatic Enrollment
Despite increases in employee enrollment rates, quality of participation continues to remain a challenge.
LINCOLNSHIRE, IL, October 25, 2006 -- While automatically enrolling employees into 401k plans is an effective way to increase participation rates, a new study by Hewitt Associates, a global human resources services company, shows that most employees will still not meet their long-term retirement goals unless companies do more to structure the plans in a way that helps improve the quality of employee participation.
Hewitt's study examined the saving and investing habits of employees who were automatically enrolled in their companies' 401k plans and compared it to employees who joined the plan voluntarily. Of the 2.6 million U.S. employees analyzed, more than 90 percent of workers participated in a 401k plan if their company automatically enrolled them, compared with just 68 percent for employees at companies who did not offer automatic enrollment. But while participation rates dramatically increased, Hewitt's findings showed that most automatically enrolled employees remained at the default contribution rate and thus added less to their 401k plan than employees who contributed through traditional enrollment. They also had less-diversified portfolios and were less likely to actively rebalance or make transfers within their plans.
"While automatic enrollment is proving to be an effective tool for getting employees into the 401k plan, it isn't a cure-all for helping people meet their retirement needs," said Pamela Hess, director of retirement research at Hewitt Associates. "Most employees are defaulted at a low rate and into a conservative fund, and they do not take an active role in managing their 401k accounts — whether it's because of inertia, lack of interest, or simply because they don't realize they need to be actively involved."
"As recent retirement legislation like the Pension Protection Act encourages more companies to consider adding automatic enrollment to their 401k plans, it's critical that they not only focus on getting people into the plan, but also consider the quality of participation. Companies should take time to review appropriate default contribution rates and investment funds, and consider coupling automatic enrollment with other automated tools, targeted education and resources that force employees to save and invest more wisely."
Low Default Rates Impact Employees' 401k Contributions
Because the majority of companies (70 percent) with automatic enrollment had a default contribution rate at or less than 3 percent, employees under automatic enrollment contributed less (6.8 percent) than those who were traditionally enrolled (8 percent). These employees were also less likely to contribute higher than the company match, only contributing up to 1.2 times the match threshold on average compared with 1.6 times for employees voluntarily participating in the 401k plan.
"Most employees who are automatically enrolled tend to stick with the employer-provided default contribution rate, so simply getting them into the 401k plan at a minimal contribution rate isn't going to help them meet their long-term retirement needs," said Hess. "Companies should strongly consider increasing the default contribution rate and coupling automatic enrollment with contribution escalation, which automatically increases employee contributions to the 401k plan and helps get them to a better savings rate over time."
Default Investment Options Key to Achieving a Well-Diversified 401k Portfolio
Nearly half (42 percent) of the companies that automatically enrolled employees in a 401k plan defaulted them into a stable value or money market fund. As a result, employees who were hired under automatic enrollment had significantly less equity exposure than employees who were traditionally enrolled. Employees hired under automatic enrollment with a default into a stable value fund contributed only one-third (31 percent) of their assets to equities, while those defaulted into a target maturity or balanced fund invested the same amount in equities as those who were traditionally enrolled (67 percent).
"Confusion and lack of investment knowledge may play significant roles in employees sticking with the default investment funds for long periods of time, and the result can be an extremely conservative investment allocation," said Hess. "Although there is still a large percentage of companies that default employees into a stable value or money market account, the Pension Protection Act and recent Department of Labor guidance encourages companies to use equity-based default options under automatic enrollment. In particular, we recommend that companies default employees into target maturity funds, which are the easiest, most cost-effective way to enable employees to be well-diversified without having to make investment decisions or take an active role in managing their accounts."
About Hewitt Associates
With more than 60 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,400 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 350 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 22,000 associates. For more information, please visit www.hewitt.com.
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