Automatic Enrollment Positively Impacts 401(k) Participants

Automatically opting employees into their workplace retirement plans has a strong influence on participant saving and investment behavior.

Vanguard reached this conclusion after looking at data from over 800,000 newly hired employees in 520 defined-contribution plans investing in Vanguard funds.

Researchers found that participation rates among new hires tripled to 91% under automatic enrollment, compared with 28% under voluntary enrollment. Ninety-two percent of participants in plans with automatic enrollment still participated after three years, versus 29% of participants under voluntary enrollment.

Under automatic enrollment, plan participation rates rose the most among young and low-income workers. Employees earning less than $15,000 had a participation rate of 82% under automatic enrollment versus 4% under voluntary enrollment. And nine out of every 10 employees younger than 25 participate under automatic enrollment, versus less than two in 10 for this age group under voluntary enrollment. However, while the benefits are greater for these two demographic groups, new-hire participation rates in plans with automatic enrollment are also higher for those earning more than $150,000 a year.

Participation in an auto enroll plan also affects contribution rates over time. In automatic enrollment plans with no increase feature, the number of participants who remain at the default deferral rate set by the employer declined from 50% after 12 months to 37% after three years. One-third chose to override the employer’s default for contributions and raise deferral rates after three years. In total, more than nine in 10 eligible participants remained at the default deferral rate or higher after three years.

About half of those in an auto enroll plan with a savings increase feature remained in the automatic plan design after three years, with 17% increasing their contribution rate while retaining the increase feature. Another quarter boosted their contributions while dropping the auto-increase feature. So, while half remained in the original deferral rate design, nine in 10 had deferral rates above the initial default design.

Participants who increased their deferral rate and did not use an auto-increase achieved a deferral rate of about 10% of salary. Those who increased their deferral rate and retained the automatic increase achieved a rate of about 12% after three years.

Source: “Automatic Enrollment: The Power of the Default,” by Jeffrey W. Clark and Jean A. Young; Vanguard Research, February 2021.