Posted on 12 June 2012
By Mark Miller
So much for the notion that workers will drop out of their workplace retirement savings plan if employers automatically enroll them at aggressive contribution rates.
That’s been the often-heard excuse for auto-enrollment rates in 401(k) plans averaging 3 percent. But a study released on Tuesday by New York Life Retirement Plan Services found that workers in plans with higher default initial contribution rates are more likely to stay in their plans, increase their contribution rate and personally manage their investment choices.
Low default initial contribution rates are a persistent problem in 401(k) plans with auto-enrollment. Sixty-six percent of workplace plans with automatic enrollment set a default contribution rate of 3 percent or less, according to Aon Hewitt. Employers know there’s a problem here: 70 percent of plan sponsors recommend that workers contribute at least 9 percent of income.
One reason may be employer caution, says David Castellani, CEO of New York Life Retirement Plan Services. “In the early days of default enrollment, there has been some timidity – plan sponsors decided to start off with lower numbers,” he said.
But a more important factor is the increased cost of employer matches that accompanies higher worker contributions.