According to research by the Urban Institute, many plans using automatic enrollment are reducing their match to keep their costs steady. Though many plans increase participation rates through the use of automatic enrollment, in order to avoid discrimination testing, they have to match at least 3% of employees’ pay. In addition, more low-balance accounts means that the cost to service the plan increases.
Though auto enrollment may seem like a panacea for one problem — participation rates — it’s clear that it has caused another: low deferral rates starting at 3%. This new study highlights another problem: decreased matching contributions overall, which can lead to lower deferral rates for participants who are not automatically enrolled. For most companies, increasing benefit costs is out of the question, with many trying to reduce costs.
It’s unlikely (maybe even unfathomable) that the federal government will increase the current tax benefits for retirement savings accounts as they try to balance the budget. Providers must either (1) reduce their costs — or more likely, their services — in order to maintain more accounts with lower balances; or (2) raise participant fees — which further hurts outcomes.
So where is the money coming from to pay for the matches of automatically enrolled participants? Unfortunately, it seems that it’s coming from the matches of participants who were already contributing.
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