Automatic enrollment in 401(k) plans levels the participation playing field among employees of different races.
As part of a recent study,
The Vanguard Group Inc. examined seven defined-contribution plans containing a total of 250,879 employees. Of those workers, 163,971 were Caucasian, 7,779 were Asian, 51,725 were African-American and 23,796 were Hispanic.
The study showed that companies with voluntary enrollment into retirement plans had 77% of white employees and 91% of Asian employees participating. Participation rates were drastically lower for black and Latino workers, standing at 59% and 68%, respectively.
Switching to automatic enrollment, however, brought up participation rates across the board and helped reduce the disparity between the groups. Participation rates hit 93% for Caucasian workers in plans with auto enrollment, while black and Latino workers' rates climbed to 90% and 92%, respectively. Asians had the highest rate of participation at 96%.
Naturally, raising the number of people participating in plans also increased the use of target date funds: 84% of participants who were automatically enrolled into their 401(k) plan were put into a target date fund, compared with 23% of those in plans where workers need to opt into the plan.
Still, while automatic enrollment brought more workers to the plan, deferral rates remained low, suggesting that plans are sticking with low default deferral rates, according to Vanguard.
On average, employees in plans with auto enrollment had a deferral rate of 4.8%, compared with an average deferral rate of 5.6% in plans with voluntary enrollment.
The study also showed some differences across racial and ethnic groups when it came to deferral rates. In plans with auto enrollment, white employees socked away an average of 5.1% of their pay, while blacks and Latinos put away 3.7% and 4.1%, respectively. Asians saved the most, with a 7% deferral rate.
While deferral rate differences may seem small right now, they'll likely have a major impact on retirement savings years later, Vanguard concluded.
“It's important to note that if the average deferral rate is 6%, a one point difference is 17% lower,” wrote authors Cynthia Pagliaro and Stephen Utkus. “Over time, these differences can translate into meaningfully lower retirement account balances.”
