Friday, May 29, 2015

Employers With Automatic Enrollment 401(k) Plans Offer, On Average, 11 Percent Lower Match Rates

From Bureau of Labor Statistics, Monthly Labor Review, May 2015, "Automatic enrollment, employer match rates, and employee compensation in 401(k) plans":
Our results confirm previous findings that plans with automatic enrollment have, on average, higher participation rates. However, we find no evidence that total compensation costs statistically differ between firms with and without automatic enrollment. In addition, we find no evidence (1) that DC [defined contribution] costs of employers with opt-out 401(k) plans are any different from those of employers with opt-in 401(k) plans or (2) that automatic enrollment results in a crowding-out effect between DC costs and other forms of compensation. Finally, we do find that plans with automatic enrollment offer match rates that are, on average, 0.38 percentage point (or 11 percent) lower than the rates of plans without automatic enrollment, even when we control for other characteristics. Given the average wage, participation, and match rates of the plans in our sample, this translates into a savings of roughly 7 cents per labor hour, which offsets the additional costs of 6.5 cents resulting from higher participation in autoenrollment plans. [Emphasis added.]
The study raises issues on whether the general welfare of society is increased or decreased by employer mandated 401(k) enrollment. The employee who would self-enroll without an automatic provision is seeing a decline in the employer match amount without an offsetting increase in their total compensation since the savings are used to pay for the increased matching cost from the automatic enrollment of other employees who would not otherwise enroll. The employees who would not otherwise enroll are seeing a decrease in their take home pay due to the automatic deduction for their share of the 401(k) contributions, when their choice was for a higher take home pay instead of saving for retirement. Is the increase in the 401(k) savings for retirement of those employees who would not otherwise enroll, enough to offset their loss in general welfare from the decline in their take home pay and the decline in general welfare for the employees who would self-enroll with a lower matching rate?

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