Benefits and Compensation

Retirement Plans with Auto-enrollment Found to Be Lowering Employer Matches

If your retirement plan committee is satisfied with the automatic enrollment policy in place but has expressed concerns about the rising cost of the employer match that a growing participant base can bring, new research may provide a window into how other employer plan sponsors are handling this dilemma.  

Automatically enrolling employees in company retirement savings plans has become a  widespread feature of 401(k) plan design because it significantly influences how much workers save for retirement – both directly through employer matching contributions and indirectly through setting a default employee contribution rate. 

But while auto-enrollment policies have been successful at raising participation rates (they also help plans satisfy nondiscrimination tests by including more lower-paid workers), they may not boost workers’ total retirement savings. If sponsors prioritize keeping their overall compensation costs at a constant level, matches may be reduced.

A new brief based on a research paper from the Center for Retirement Research at Boston College using 2010-11 data from the U.S. Bureau of Labor Statistics’ National Compensation Survey found that plans with auto-enrollment have lower employer match rates than plans without auto-enrollment. 

In the October brief, “How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation?,” two retirement plan researchers theorize that ”while auto-enrollment will increase saving for workers who would not have participated without it, those who would have participated on their own may end up saving less due to relatively low employer match rates and low default contribution rates.”

Importantly for plan sponsors worried about rising costs coming hand in hand with auto-enrollment, a separate data analysis the researchers conducted found no evidence of higher 401(k) expenses for companies with auto-enrollment. 

Lowering the employer match isn’t the only option when faced with rising 401(k) costs, the brief said. A company with auto-enrollment has four options:

  1. directly reduce matching costs by lowering the match rate per dollar of employee contribution or by lowering the ceiling on the percent of contributions it will match;
  2. indirectly lower matching contributions by setting a default employee contribution rate below the level needed to obtain the maximum employer match, which few participants are likely to raise;
  3. offset higher match costs by reducing wages or other non-401(k) benefits; or
  4. keep its compensation policies the same and simply allow total compensation costs to rise.

To read the complete story on Thompson’s HR Compliance Expert, click here.