Nov 29 A growing number of employers automatically enroll new workers in their retirement saving plans, boosting participation rates and the use of other automation features.
That's the key finding of a new Fidelity Investments analysis of the impact of the Pension Protection Act of 2006 (PPA) on 401(k) plan design and participant saving behavior. The analysis is based on data at the end of the third quarter of this year from 20,600 corporate defined-contribution plans administered by Fidelity, covering 11.7 million participants.
The PPA encouraged adoption of auto-enrollment features and default investment options, mainly target date funds (TDFs), which set and adjust equity and fixed-income allocations by participant age. Fidelity reports that 51 percent of its 401(k) participants are now in plans that auto-enroll employees automatically when they are hired, up from just 16 percent five years ago.
This mirrors findings of another study, by the Profit Sharing/401(k) Council of America released on Wednesday. That study found that 8 percent of plans added an auto-enrollment feature in 2010 alone.(The PSCA study also found a "dramatic" increase in the number of employers tinkering with their 401(k) investment choices.)
Employees may opt out of auto-enrollment plans, but participation rates at companies that now have them stands at 82 percent, compared with 55 percent at companies with plans that don't auto-enroll, according to the Fidelity study.
Across all Fidelity-administered plans, the participation rate stood at 66 percent at the end of the third quarter, up from 64 percent in 2007, says Beth McHugh, vice president of market insights at Fidelity. "The overall participation rates are moving more slowly because most plan sponsors only auto-sweep their new hires," she adds. "Very few are auto-sweeping their existing workforce."
Auto-enrollment is having dramatic impact on young workers. Employees age 20 to 24 working for companies that auto-enroll are participating at a 76 percent rate, compared with just 20 percent at plans without the automatic feature.
And most auto-enrolled participants are defaulted into TDFs, which in turn is affecting the conservative investment allocations evident among many young investors over the past few years. Fidelity says participants in their 20s who are in auto-enroll plans have average equity allocations of 80 percent. Overall, the percentage of plans that automatically put workers into TDFs has soared to 73 percent from just 11 percent five years ago.
One problem with auto-enroll plans is that most set their default initial employee contribution rates too low for workers to achieve retirement success. Fidelity says 62 percent of all its auto-enroll plans set a 3 percent initial employee contribution rate -- and 78 percent have rates at 3 percent or less.
"Some even set it at 1 percent," McHugh says -- although she adds that opt-out rates aren't any higher for plans with initial rates as high as 5 percent. Fidelity advises its clients to set auto-enroll employee contribution rates anywhere from 10 to 15 percent, she adds.
Fidelity reports that 76 percent of plans offer participants the opportunity to opt for an annual automatic increase in contribution rates, but only 10 percent of workers select the option.
Another plan option that apparently isn't ready for prime time is the Roth 401(k). The PPA permits plan sponsors to offer Roths, which are funded with taxable contributions and offer tax-free distributions. Fidelity says 31 percent of its administered plans now provide a Roth 401(k), and that nearly half of all 401(k) participants are in plans that offer them.
But just 6 percent of participants are using Roth 401(k)s, up from 3 percent five years ago. Gen Y investors have been more enthusiastic -- 9 percent are using a Roth 401(k).
"We're definitely seeing more interest and questions about Roths in workplace plans," McHugh says. "Younger employees actually are recognizing that if they're in a lower tax rate today, they can pay the tax bill now and minimize their taxes down the road."
But the first hurdle is just getting individuals who can take advantage of pre-tax contributions to do so, and save more, McHugh says. "The Roth is for individuals who are thinking more about diversifying their tax liability now and in the future," she says.
Fidelity said the average account balance at the end of the third quarter was $64,300, down 2 percent from a year ago. Among participants who were continuously active for 10 years, real account balance growth averaged 10.5 percent over that period.
The author is a Reuters columnist. The opinions expressed are his own.