Automatic Enrollment for Retirement Savings

Policymakers and employers who are concerned about workers preparing for retirement focus on getting more people to save. A critical question to ask, then, is: Should employees be automatically enrolled in a retirement savings plan?

When a worker is automatically enrolled in a plan, contributions are set at a default rate, such as 3 percent of his or her wages or salary, with the employee able to opt out of the plan or change the contribution level. Auto enrollment serves to overcome a worker’s inaction, since many workers are stymied by the complex or overwhelming information retirement plans provide.

The Pension Protection Act of 2006 authorized employers to automatically enroll workers and, increasingly, private sector employers are automatically enrolling new hires into 401(k) plans. According to client data from the mutual fund company Vanguard about the plans it manages, 46 percent of retirement plans use automatic enrollment, up from 20 percent in 2008, with the percentage varying greatly by company size: 65 percent of plans with 5,000 or more participants use auto enrollment, but only 30 percent of plans with 500 or fewer participants do so.

The effect is dramatic: Looking again at Vanguard’s database, 92 percent of employees participated in auto enrollment plans, with only a small percentage opting out, while 57 percent enrolled in voluntary plans.

In separate focus groups of small business owners and workers, conducted by The Pew Charitable Trusts, some workers and owners expressed unease about automatic enrollment out of a fear that workers may not notice their participation and the accompanying reduction in take-home pay. In a follow-up survey of small business owners, also conducted by Pew, 40 percent of plan sponsors who don’t use auto enrollment said it was because their employees wouldn’t like it. However, employees surveyed by Pew were mostly supportive of the idea; 55 percent of those without a retirement plan at their job said they would stay in a plan if automatically enrolled by their employer, as opposed to 14 percent who would opt out and 29 percent who were unsure.

In a separate analysis of the worker data, Pew found that the vast majority of survey respondents repeatedly indicated that they would remain in a retirement plan and begin saving for their future if automatically enrolled—regardless of their perceived motivators and barriers, the plan sponsor, or if they have access to an employer-sponsored plan.

Policymakers at the state level have taken notice of automatic enrollment as a tool to possibly remedy the lack of retirement savings among private-sector employees who don’t have a plan at their workplace—a scenario that could affect poverty levels and, as a result, state budgets. California, Connecticut, Illinois, Maryland, and Oregon—and the city of Seattle—automatically enroll such private-sector workers into statewide or citywide retirement savings plans, a significant experiment that policymakers in other states are watching closely. In the Pew employee survey, workers without a plan were asked what they would do if auto-enrolled into a state-sponsored plan. Just as when employees were asked what they would do if auto-enrolled by their employers, a clear majority said they would stay in a state plan. 

The fact that the use of automatic enrollment is not universal may reflect, in part, a concern that auto enrollment will hurt poor workers who can’t afford to save. But people without access to a workplace plan include not just low-income workers but also middle- and upper-income workers. According to one estimate, some 25 to 30 percent of private-sector employees don’t have access to a retirement plan, which is a pool well beyond the 6.3 percent of working Americans whose incomes fall below the poverty level.

Although there are low-income workers who would be eligible to be automatically enrolled in a state-sponsored plan, many are young and just beginning their working lives. According to the market feasibility study for California’s CalSavers plan, about 60 percent of the nearly 7 million eligible workers in the state are under 40 years of age. Some will remain in low-wage jobs, but others will progress to higher paying jobs over time.

And if all workers without a workplace plan were poor, and therefore saw themselves as not able to save, we would expect that employers would cite low demand from employees as a key reason for not offering a retirement plan. But Pew’s employer survey found that, among small employers, the two leading reasons for not offering a plan were high start-up costs and lack of administrative capacity.

Automatic enrollment is highly effective at getting people to save for retirement. As states and private-sector employers gain more experience with automatic enrollment, The Pew Charitable Trusts will continue to assess the outcomes.

John Scott directs The Pew Charitable Trusts’ retirement savings project.

This article was originally published on Forbes on September 4, 2018.