Shift to Autoenrollment Plans Lifts 401(k) Participation

The increasing adoption of an automatic enrollment framework for employer-sponsored 401(k) retirement plans promises to overcome persistent problems faced by eligible nonparticipants in traditional 401(k) programs.

By simplifying retirement planning and making employees opt out of, rather than opting in, retirement savings plans, autoenrollment avoids “analysis paralysis” and allows participant inertia to work in favor of a secure financial future. The Shriver Center supports this development and encourages companies to assist employees further by matching contributions and offering financial education programs.

Participants’ reactions to the new plans have been positive. According to a recent survey done by Retirement Made Simpler, a new coalition jointly launched by AARP, the Financial Industry Regulatory Authority, and the Retirement Security Project, 95 percent of nearly 700 adults enrolled in automatic 401(k) programs said that the vehicle made saving for retirement easy, and 85 percent said that it helped them start saving earlier than they originally planned. Only 7 percent of those autoenrolled opted out of the plan. An additional survey by Diversified Investment Advisors found that, out of 223 companies with 1,000 or more workers, 62 percent had implemented autoenrollment, a 7 percent increase from 2006, while a further 33 percent said that they were considering autoenrollment.

Contribution levels for autoenrollment plans typically start at 3 percent of income, according to Internal Revenue Service guidelines, and employees have up to 90 days after enrollment to opt out and receive their money back. Annual contribution levels can then automatically escalate by 1 percent each year, up to the maximum contribution level of 10 percent.

The procedural shift is due in large part to the Pension Protection Act of 2006, a pension overhaul bill that took effect on January 1, 2008, and opened the door for companies to add autoenrollment by easing liability concerns over withholding worker wages.

For more information, contact Dory Rand at doryrand@povertylaw.org or Brian Clappier at brianclappier@povertylaw.org. You may also learn more about developments in retirement planning on the Brookings Institution website, http://www.brookings.edu/topics/retirement.aspx.