Auto-enrollment, matching, and participation in 401(k) plans

1. Description of the programme
2. The study
3. What are the outcomes?
4. Points to consider

Description of the programme

This study aims to explore the effect of automatic enrolment and employer matched contributions on pension participation rates in the United States for a particular type of plan, as well as examining the effect of automatic enrolment on employer average contributions. The area of interest is the 401(k) plan. (For information, this is not a defined contributions type of plan, but is based on Profit Sharing or Stock Bonus)

A common element of 401(k) plans is that employees are required to contribute a portion of their salary (known as elective deferral) to the plan in order to participate. Plans can be either auto-enrolment (i.e. employees have to opt out if they do not wish to participate) or opt-in. Although sponsoring employers are not required to contribute to their 401(k) plans, they usually do; these may be either non-matching made at the sole discretion of the employer, or matching, made by the employer in response to an elective deferral. Non-matching contributions are typical in profit-sharing plans and may be structured as a variable or fixed profit sharing contribution.

The study

The study includes an overview of the literature on 401(k) plan design and states that this “has delivered conflicting accounts of how 401(k) provisions affect participation” (Andriettiy 2015), with a wide range of findings.

The research conducts secondary multi-variate analysis of plan-level annual data from Form 5500 Private Pension Plan (PPP) Research Files provided by the Employee Benefits Security Administration (EBSA) of the US Department of Labor (DOL), covering the period 2009-12. The sample is limited to single-employer sponsored 401(k) plans with more than 100 participants during the period 2009-2012, totalling 207,627 plans.

Empirical analysis is conducted to examine the effects of automatic enrolment and employer matching on raising 401 (k) plan participation rates, and analyses the effect of automatic enrolment on employer match rates.

What are the outcomes?

• Pension participation rates
• Extent of employer contributions

Points to consider

• Both auto-enrolment and average match rates are found to have positive and significant effects on participation rates, with auto-enrolment found to have a substantially higher effect. This is in line with previous studies and is based on both descriptive statistics and the author’s empirical analysis.
• Auto-enrolment plans have significantly higher participation rates, but the effect varies by type of plan.
• The average match rate is positively and significantly related to participation rates - on average each 25 percentage point increase in the average match rate raises participation by 5.5% (across all plan types), however, offering a match rate does not significantly increase participation in plans with auto-enrolment.
• Auto-enrolment is generally found to have a positive effect on average match rates. This finding is in contrast to previous studies which the author assesses have greater limitations based on the data sets used.

Full report

Auto-enrollment, matching, and participation in 401(k) plans - full report