While automatically enrolling workers in a 401(k) plan typically results in 90% participation, up from 68%, workers tend to keep contribution rates at the default level—and as a result will be ill-prepared for retirement. This is according to an analysis of 2.6 million 401(k) participants by Hewitt Associates.
Hewitt found that those who chose to participate in their company’s 401(k) plan contributed more, had more diversified portfolios and tended to rebalance them periodically. Seventy percent of companies with automatic enrollment have a default contribution rate of 3% or less. As a result, those in automatic enrollment plans invest an average of 6.8% of their salaries, compared to an average of 8% by those in plans without automatic enrollment. And 42% of companies with automatic enrollment steer employee’s 401(k) money to a stable value or money market fund.
“While automatic enrollment is proving to be an effective tool for getting employees into the 401(k) plan, it isn’t a cure-all for helping people meet their retirement needs,” said Pamela Hess, director of retirement research at Hewitt. “Most employees are defaulted at a low rate and into a conservative fund, and they do not take an active role in managing their 401(k) accounts—whether it’s because of inertia, lack of interest or simply because they don’t realize they need to be actively involved.”
As a result, Hewitt is recommending that employers increase the default contribution rates and change the default investment choice to target-date funds.