Posted on 07 March 2013
By Mark Miller
Are employers stingier with their 401(k) matching contributions when they automate the enrollment process?
Auto-enrollment has been a hot trend in the 401(k) world over the last few years. The idea is to nudge workers to save who might not otherwise do so through a simple behavioral change: action needs to be taken to opt out, instead of opt in.
Auto-enrollment boosts participation rates sharply, but there has also been a downside. The average initial default contribution rate in auto-enroll plans is just 3 percent – far too low to generate meaningful account balances. Many workers contributing at that level also are leaving money on the table when the employer’s matching contribution is higher.
However, a new study points to a another problem: Some employers who adopt auto-enrollment offer smaller matching contributions. The report, by the Urban Institute and the Center for Retirement Research at Boston College, found that matching contributions in auto-enrollment plans were averaged 3.2 percent of workers’ salary, compared with 3.5 percent for voluntary-enroll plans.
Most industry players and analysts dispute that finding – emphatically. But the best evidence suggests that two trends actually are developing: Smaller retirement plans are stingier with their matching contributions, while big plans are more generous. That will make it more difficult for workers in smaller plans to accumulate retirement savings – and roughly one-third of U.S. 401(k) savers are enrolled in smaller plans (2,500 or fewer participants), according to data from the Employee Benefit Research Institute (EBRI).
Learn more in my column today at Reuters Money.