Automatic Enrollment Works — Where It’s Available

Automatic enrollment more than doubles participation rates, at least among new hires, according to a new study.

In fact, during the three-and-a-half-year period of the study, the participation rate for new hires was 91% under automatic enrollment (AE) versus 42% under voluntary enrollment (VE). Moreover, the Vanguard study found that after three years, 89% of participants hired under AE were still participating versus 51% of participants under VE who had chosen to join the plan.

The design had a striking impact across all income, age, and genders. Just 22% of workers earning less than $30,000/year participated in the VE plans, compared with 87% in AE programs. As income rose, participation rates also rose in VE plans; 41% of those earning $30,000 to $50,000 participated, 49% of those earning $50,000 to $75,000, and 65% of those earning $75,000 to $100,000. However, among AE plans, the participation rates were 90%, 93%, and 94%, respectively.

Moreover, Vanguard noted that the participation rate among employees earning less than $30,000 is around 80% — regardless of whether the initial default contribution rate is 2% or 6%.

However, and as other industry surveys have found, many plans are only extending automatic enrollment to new hires. Half of the plans in the Vanguard sample did sweep existing nonparticipants, although the focus of the analysis was exclusively on the new-hire effects.

The Vanguard report noted that there is a slight tendency for plan participation rates to rise with time, and that after three years, the average participation rate under voluntary enrollment is 50%, up from 33% initially. However, with automatic enrollment plans, the participation rates held steady at about 90% after the first six months — and 90% after three years.

Automatic Enrollment Limitations

However, automatic enrollment alone has its limitations. After three years, fewer than a third of participants have chosen to override the employer’s default and raise contribution rates, and another 9% have signed up for a contribution rate increase. In total, around 9 in 10 eligible participants after three years remain at the default deferral rate or higher.

Among AE plans with an automatic increase feature, after three years, just over half (57%) of participants remain in the original automatic plan design, including the automatic increase feature, with another 8% increasing their contribution rate while retaining the increase feature, for a total of 7 in 10 retaining the automatic increase feature. The Vanguard researchers found that another 21% have increased contributions, but dropped the automatic increase feature. The bottom line: while just over half remain in the original deferral rate design, about 9 in 10 participants have taken some action that leaves deferral rates above the initial default design.

Vanguard acknowledged that, in the sample of plans studied, the average participant contribution rate for new hires in voluntary plans is higher, at 6.3%, than the 5.4% rate for those in AE plans. However, when considering the contribution rates for the entire eligible employee population (rather than just those who actually participate), the average contribution rate among VE plans was just 2.6% versus 5.0% among AE programs over the three-year period.