Are Employers Offsetting Match for Increased Participation?

Researchers from the Center for Retirement Research at Boston College used data from the National Compensation Survey (NCS) conducted by the U.S. Bureau of Labor Statistics to examine the relationship between auto-enrollment and employer decisions about matching contributions and overall compensation. The researchers first confirmed that the auto-enrollment plans in the sample have higher participation rates—77% vs. 67%. These higher rates will increase employers’ total compensation costs.

The study found workers covered by auto-enrollment have a maximum match rate of 3.2% of pay, compared with 3.5% for those in plans without auto-enrollment. According to the Issue Brief about the study, while this finding shows that, on average, plans with auto-enrollment have lower match rates, this difference might be driven by factors other than the automatic enrollment provision. For example, a larger percentage of the workers covered by auto-enrollment in the sample have defined benefit (DB) plans in addition to 401(k)s. Since these workers have an additional source of pension coverage, their employers may offer less generous 401(k) matches. If so, defined benefit plan coverage could be driving the lower matches in auto-enrollment plans.

However, further analysis found that participants in plans with auto-enrollment have a match rate that is 0.38 percentage points lower than those without an automatic provision, even after controlling for other factors.

The researchers also considered whether employers may be using low default rates to limit their own contributions. Plans with an auto-escalation feature were included in the sample.

On average, the default contribution rate for the auto-enrollment plans is 3.4%; it drops to 2.8% if plans with an auto-escalation feature are classified by their initial default rate rather than their full escalation default rate. To receive the maximum match in the sample plans, workers would need to contribute an average of 5.1%. So the default rate is set well below the rate needed for the maximum match.

The average employee contribution rate in all 401(k) plans, including those without auto-enrollment, was considered as a benchmark. This data was not available for the sample plans, but employer surveys typically find a median rate of 6%—well above the default rate used by employers with auto-enrollment. According to the researchers, these results suggest that, in addition to offering lower maximum match rates than plans without auto-enrollment, employers with auto-enrollment may be using their default employee contribution rate to help offset the higher costs that come with higher participation rates.

Finally, the study examined actual compensation costs rather than employers’ 401(k) plan design decisions when automatic enrollment is used and found no evidence that total compensation, 401(k) costs, non-401(k) costs or wages differ between plans with and without auto-enrollment.

“Auto-enrollment policies are still quite new and future changes in plan design—such as more widespread use of auto-escalation—could have more positive effects on retirement saving levels. Therefore, it will be important to continue monitoring auto-enrollment both on the employer and the worker side to more fully assess its long-term impact on retirement saving,” the researchers concluded.

“How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation?” can be downloaded from here.