Effect of employer matching on federal employees’ saving underestimated
Participation in the retirement plan increased, but that was not all.
There’s been plenty of research on the effects of factors such as employer matching and auto-enrollment on private-sector employees and 401(k)s, but when it comes to federal employees, it’s been a veritable information desert.
So the Congressional Budget Office decided to check it out and see whether the same study-based assumptions for private-sector workers hold true for federal workers, and surprise, surprise – they don’t. In fact, according to the CBO study, “most of the estimates from the literature substantially understate the effect of matching.”
The study used data spanning the period 2008–2014, and tracking employee behavior on contributions to the Thrift Savings Plan, their balance in each asset, default contribution rates, eligibility for matching contributions and other information on their TSP activity.
It compared employee behavior under two major changes in policy regarding federal employee retirement benefits:
- The switch in 1984 from the Civil Service Retirement System, which provides a defined benefit pension but no employer contributions to TSP
- The implementation of automatic enrollment with a default contribution rate of 3 percent for workers hired after August 2010
Workers hired in 1983—under the old system, which did not offer a match—did not contribute at the same rate, with just 69.5 percent kicking in to their plans.
However, those hired in 1984, who were covered by the TSP, not only contributed at a considerably higher rate—91.7 percent—but also had a higher contribution rate overall (9.2 percent, compared with 5.9 percent, as a percentage of salary) and had a higher contribution rate when considering only those in the earlier cohort who did contribute to their plan under CSRS (10 percent, compared with 8.5 percent, as a percentage of salary).
The workers under the new plan also had a much higher average ratio of retirement account balance to pay, with the TSP folks coming in at 2.5 compared with the CSRS folks at just 0.8.
Then there’s the effect of auto-enrollment. Among those hired under the TSP before auto-enrollment went into effect, the percentage of workers who contributed to the plan was 60, with an average contribution rate of 2.9 percent of their salary.
The story was quite different for those who were brought in once auto-enrollment was in effect, with the percentage of contributing workers at 96.7 percent and their average contribution rate at 4.4 percent.
The study concluded the following under the employer match:
- Participation increases by 22 percentage points.
- Conditional contribution rate increases by 1.9 percentage points.
- Average contribution rate increases by 3.5 percentage points.
- Balance-to-pay ratio is twice as large 28 years later.
In addition, the share of bonds in workers’ portfolios increases by 7 percentage points.
Other study conclusions include the information that among workers hired under auto-enrollment, women, workers older than 30, black and Hispanic workers, less educated workers and those in the bottom tercile of the earnings distribution are more likely to stick with the default contribution rate and fund.
But when compared with private-sector workers, federal workers are more likely to move away from the defaults, and faster, with the effect of automatic enrollment “strongest among the groups that have lower participation and contribution rates in its absence.”
The study also found that participation increased by 37 percentage points at zero–4 months of tenure, and by 13 percentage points at 41–52 months of tenure. In addition, at 41–52 months of tenure, the average contribution rate rose by 0.5 percentage points and the balance-to-pay ratio rose by 2.3 percentage points, while the effect on portfolio allocations was negligible.
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