Nearly a third of Americans age 55 and over have no retirement savings, and defined benefit pension plans are going the way of the dinosaur. So you'd think that employers would be doing a great thing when they automatically enroll employees in 401(k) plans.
Auto enrollment, as the practice is known, does increase employee participation in retirement plans. A recent study by Towers Watson found that the share of employers with more than 80 percent participation rates in defined contribution plans increased from 50 percent in 2010 to 64 percent in 2014 as the share of companies offering automatic enrollment rose from 57 percent to 68 percent.
But the good news stops there. Employees participating in auto enrollment tend to contribute less than people who sign up for 401(k) plans on their own, often because their employers set a low default contribution level.
Vanguard has examined the defined contribution retirement plan assets it manages, and in a recent study the firm reported that average default contributions have decreased from 7.3 percent to 6.9 percent since 2007. "While automatic enrollment increases participation rates, it also leads to lower contribution rates when default deferral rate sare set at low levels," the report concluded.
"Participation is much higher, but the savings rate is much lower, unfortunately," said Rob Austin, director of retirement research at Aon Hewitt. He said that in the more than 140 plans Aon Hewitt recently studied, the rate of participation in defined contribution retirement plans reached an average of 85 percent for employers offering automatic enrollment, compared to 62 percent for those that do not.
Still, "over time, the average savings rate in plans with auto enrollment is lower than in plans that put in money themselves," he said. "People who put in money at a default rate of 3 percent leave it there, whereas if people pick their own savings rate, they would probably pick something much higher."
Austin said he knew of one employer that set a default contribution rate of 1 percent and then realized that employees were sticking at that low level, to their detriment, so employer dropped auto enrollment.