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Should I Use Auto Enrollment for My Company’s 401(k) Plan?

There’s no question that plan sponsors are concerned about their employee’s retirement readiness.  After all, it’s the reason why companies offer 401(k) plans in the first place.

When the auto enrollment feature was first rolled out a little over ten years ago, it got little to no attention.  Voluntary enrollment by eligible employees was the norm at the time, and the average participation rate was about 63%.  The voluntary process was (and still is) entirely dependent on employee action to open a 401(k ) account—spending time obtaining and filling out forms, choosing which amount to defer from their paycheck, etc.  Human nature being what it is, these steps lend themselves to procrastination, and it showed in the data.  For whatever reason–and there are a million of them—over a third of eligible employees never opened a retirement account with their employer.  What’s even stranger is many of them were also eligible to receive employer matching cash–and left it on the table!

Auto enroll is different–it takes away the potential for procrastination and assumes the employee will participate, unless they actively choose to opt out. In other words, employees do not need to take any action; they are automatically signed up.   Ten years ago, many employers looked at this as an intrusion into their employees’ lives and choose not to have it as an option in their plans.

Ten years later, how has the ‘experiment’ worked?  According to the latest study, automatic enrollment plans have grown by 300%.  Ten years ago, the voluntary participation rate was 63%. Guess what it is today? Yup, still 63%.  However, according to a recent data put out by Vanguard, the participation rate of auto enroll plans is at 90%!**  The same release cited overall 401(k) participation rates is at 79% percent, which is a 16% increase in the last ten years. Does auto enroll drive participation rates higher allowing more employees to become retirement ready? YES, it clear does!

In addition, auto enrolls plans default deferral rates have moved up steadily from 2-4% to 6%, and many are using an annual auto escalation of 1-2% each year.

The net effect of this valuable option is that employees are saving more than ever for their retirements–which was the objective of the plan all along.  If your plan doesn’t have this feature, you should consider adding it today.

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