Automatic enrollment of employees into defined contribution retirement plans such as 401(k)s has grown so quickly that more than half of employers now offer it to their employees, according to a new study.
Automatic enrollment of employees into defined contribution retirement plans such as 401(k)s has grown so quickly that more than half of employers now offer it to their employees, according to a new study.
The analysis from Mercer LLC of New York showed that 51% of employers surveyed offer auto enrollment. It also found that 6% of the employers planned to add auto enrollment in the coming months and another 18% were still evaluating the feature.
The study found that auto enrollment, which was given a boost by the Pension Protection Act of 2006, is a prevalent practice in most plans.
Among the 173 DC plan sponsors that responded to the online survey last month, almost half (49%) had 5,000 or more participants and the rest had fewer than 5,000 participants.
Meanwhile, 44% had more than $500 million in assets and 56% had less than $500 million.
EMBRACING THE TREND
The study showed that employers have embraced auto enrollment, said Amy Reynolds, a Mercer principal and DC retirement plan consultant.
It also found that 45% of employers that offer auto enrollment have participation rates of 90% or more. Just 7% of employers that don't offer auto enrollment achieve these levels of participation.
The study also found that 62% used a 3% default salary rate and 20% of employers used a default rate greater than 3%.
In addition, 70% of employers that use auto enrollment also used the automatic increase feature, in which plan sponsors increase participant deferral rates each year by a given amount.
Industry leaders wonder if auto enrollment may slow down, especially if the economy worsens.
"It's possible it could slow down, certainly when plan sponsors look at the cost implication," Ms. Reynolds said.
Employers that didn't use auto enrollment cited cost as a reason for not offering the feature. Employers that offer matching contributions have to pay more money if the participation level rises, which usually occurs with auto enrollment.
Cost is usually a bigger problem for smaller companies, Ms. Reynolds said.
She said she was stunned that auto enrollment has risen so rapidly since 2006.
"We were frankly surprised to see we'd gotten to this point already," she said.
Other firms have also seen a significant growth in auto enrollment.
Auto enrollment has soared in recent months, said Kevin Crain, managing director of institutional client relationships for the Merrill Lynch Retirement Group in Pennington, N.J. He is based in Hopewell, N.J.
Merrill's DC business serves about 1,700 employers with about $90 billion in assets and 2.7 million participants.
Merrill's auto enrollment business has increased by 85% between October 2007 and October 2008.
Mr. Crain said that overall, about 20% of companies offer auto enrollment. Among larger companies, about 35% offer it, he said.
So far, he said, the economy has not caused employers to slow down on their auto enrollment.
Mr. Crain also said that he has seen significant growth in companies that might choose not to use auto enrollment but have instead changed their procedures so that it is easy for participants to enroll. Many companies are offering 401(k) enrollment alongside online enrollment for health benefits.
"I really see momentum building," Mr. Crain said. "I see pretty creative thoughts on the best way to get people enrolled in a 401(k) plan."
Auto enrollment is definitely increasing, agreed Joe Ready, senior vice president of retirement services at Charlotte, N.C.-based Wachovia Corp.
He said that employers are split between offering auto enrollment to new employees and those that make auto enrollment retroactive to all employees.
Mr. Crain anticipates that if the economy continues to worsen, some companies — particularly smaller employers — might decide not to pursue this feature because of the added cost.
"If you're struggling because of the financial and economic environment, you're probably going to delay automatic enrollment decisions and potentially may have to revisit the match," he said.
Joseph Leonard, an adviser with Coastal Investment Advisors LLC in Southport, N.C., whose firm manages about $100 million in assets, said that he has noticed more employers are offering auto enrollment as well.
He is concerned that going forward more employers may be reluctant to offer it because of the economy. Mr. Leonard also wrote "Retirement Vault: A Guide to Protecting Your Assets in an Age of Uncertainty," (Second River Healthcare Press, 2008).
"They're debating it because of the finances," he said. "Companies are looking to cut costs in any way they can. Period."
E-mail Lisa Shidler at lshidler@investmentnews.com.
