Nov 29 A growing number of employers
automatically enroll new workers in their retirement saving
plans, boosting participation rates and the use of other
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
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)
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
"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
The author is a Reuters columnist. The opinions expressed
are his own.