Automatic enrollment gaining ground in the smallest 401(k) plans

The trend of automatic enrollment adoption is trickling down to the smallest plans, while employers are also increasing their deferral rates above 3%

Dec 19, 2016 @ 1:08 pm

By Greg Iacurci

Automatic enrollment gained significant traction among the smallest 401(k) plans last year, reflecting a trend that's played out more broadly across the defined-contribution marketplace over the past decade.

At the same time, plans automatically enrolling their participants are doing so at increasingly higher deferral rates, according to the Plan Sponsor Council of America's most recent annual report on 401(k) and profit-sharing plans, published Monday.

The percentage of plans with automatic enrollment among the smallest 401(k)s jumped to 25.5% in 2015, up from 19% the prior year, according to PSCA data. The report, which surveyed more than 600 plan sponsors, defines the smallest plans as those with between 1 and 49 plan participants.

“We've been talking about the availability of auto enrollment with smaller plans for a long time. It's possible it's starting to catch on,” said Hattie Greenan, director of research for the PSCA.

While employers' most common default deferral rate is 3% of an employee's annual salary, the percentage of overall 401(k) plans defaulting at a rate greater than 3% increased roughly 11 percentage points year-over-year, to 51.6%, according to the PSCA.

“I think it's definitely attributable to the education the last couple years on what is necessary for participants to save to have positive retirement outcomes,” Ms. Greenan said.

The Pension Protection Act of 2006, by providing employers certain incentives for adopting auto enrollment, has been the primary catalyst for increased use of the feature. Use has more than doubled, to 57.5%, since 2006 among 401(k) plans of all sizes.

401(k) plans with an automatic enrollment feature
Source: Plan Sponsor Council of America
401(k) plans with a default deferral rate of more than 3%
Source: Plan Sponsor Council of America

Trends in the defined-contribution market tend to trickle down from the larger employers to the smaller ones, and the same dynamic seems to be at play with adoption of automatic enrollment. For example, roughly 67% of the largest plans — those with more than 5,000 participants — use automatic enrollment.

While auto enrollment is widely lauded as a best practice in terms of 401(k) plan design, researchers recently found that it is, in some cases, correlated to higher levels of consumer debt.

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