Automatic enrollment in a defined contribution plan has been all over the news as a means of increasing participation among workers and getting them better prepared for retirement—but that doesn’t mean it’s a cure-all.
In fact, auto-enrolled older workers aren’t as enthusiastic about contributing to their retirement fund as those who enroll themselves.
That’s according to a working paper from the Center for Retirement Research at Boston College, which found that older workers who are automatically enrolled in their retirement plan at work don’t tend to contribute as much to the plan as workers who have to actively put themselves into the plan.
The paper also found, however, that, while those workers might not be contributing as much, “automatic enrollment is associated with an increased probability that older workers’ employers will contribute to their plans. As a result, employer contribution amounts and contribution rates are higher among auto enrolled workers than voluntarily enrolled workers.”
But even though these employers are contributing more on average than the employers of other workers who haven’t been auto enrolled, it’s still not enough to make up for the lesser amount that auto-enrolled employees contribute.
Those employer contributions might be higher than average, but they aren’t high enough to offset the difference.
As a result, the paper said, “the combined effect is that the retirement accounts of automatically enrolled older workers receive, on average, $900 less in annual total contributions and have 1.6 percentage points lower total contribution rates than those of voluntarily enrolled workers.”
It’s true that auto enrollment significantly increases worker participation. One study cited by the paper found an increase of 48 percent among newly hired employees and an 11 percent increase in overall participation at one company 15 months after it adopted auto enrollment.
However, since auto-enrolled employees tend to stick with whatever the default contribution is, and companies routinely set that bar low—with most setting the default contribution rate below what is required to take full advantage of employer matching contributions—those auto-enrolled employees don’t derive the full benefits of the plan just because they’re in it.
Employees who must enroll themselves, on the other hand, tend to make higher contributions.
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