Squared Away Blog

February 21, 2013

Corporate Match Falls in Auto Enrollment

Enrollment in 401(k)s is higher in companies that use auto-enrollment than in companies that don’t.  But the innovation falls short of an ideal solution to the nation’s low retirement savings.

That’s because corporations using it contribute less of their workers’ earnings to the plan than do companies without it, according to a revised paper by Urban Institute researchers Barbara Butrica and Nadia Karamcheva.

“Firms are profit-maximizers, so we’d expect that, if there is some cost to providing these benefits, they may reduce their match rates to control their costs,” Butrica said.

The researchers found that employers that automatically enroll employees in their plans match their employee contributions up to 3.2 percent of earnings, on average, which is lower than the 3.5 percent average match by employers in their study without auto enrollment.  Their statistical analysis shows that it has a significant effect.

Americans are saving very little for their retirement, and news and reports often focus on what individual employees are or are not doing right.  Why don’t they save enough?  Do they properly invest their 401(k) savings?

This research adds a different perspective:  the conflict corporations face between providing better benefits to employees – so they can recruit and retain talent – and maximizing profits to satisfy Wall Street or investors seeking higher profits.

Corporate motivations and decisions can “substantially affect future retirement security,” the authors wrote in an executive summary of their paper funded by the Retirement Research Consortium, which supports this blog.

This study confirms the basic findings in an earlier paper by Barbara Butrica and Mauricio Soto, which received some criticism for the data base used.  The new study analyzed U.S. Bureau of Labor Statistics data of 1,200 corporate saving and thrift plans – primarily 401(k)s – which Butrica called “a better data source.”

Another finding further supports the contention that 401(k) plans are not immune from corporate efforts to contain costs and boost profits.

The so-called “default” rate that employers in the study with auto enrollment set for employees who don’t actively choose their own contribution rate was only 1.8 percent of pay.  This level is below the maximum possible match – 3.2 percent on average – available from these employers.  And while one in five employers automatically increases the default contribution rate over time, this pushed up the rate to only 2.1 percent.  The default rate is particularly important because many 401(k) participants tend to stick with the default, effectively staying where they are put.

While auto enrollment boosts employee participation in 401(k) plans, they conclude “it could lead to lower account balances at retirement for those who were already enrolled or would have enrolled anyway.”

Full disclosure:  The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog.  The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.