A growing number of companies began automatically enrolling new employees in their 401(k) retirement savings plans in the wake of the 2006 Pension Protection Act — and the impact on participation rates has been dramatic. According to Aon Hewitt Associates, a consulting and outsourcing company, about 57% of large companies now automatically enroll new employees in 401(k) plans, up from 24% in 2006. While employees are free to opt out, few do. As a result, companies that use auto-enrollment report average participation rates above 85%, compared with 67% for those without auto-enrollment.
Better still, a new report from Vanguard finds that automatic enrollment is raising participation rates among all racial and ethnic groups, eliminating gaps created when white and Asian 401(k) participants voluntarily enroll at higher rates than their black and Hispanic counterparts. (For the numbers, see my colleague Catey Hill’s summary.)
But despite this trend, auto-enrollment has not led to equal savings rates among the four racial and ethnic groups. When Vanguard analyzed 2010 data “for more than a quarter million participants in seven large defined contribution plans,” it found that “whites and Asians are more likely” than blacks and Hispanics to raise their savings rates above the level their employers selected when automatically enrolling employees. (Employers typically set employees’ initial default contribution rate at 3% of salary.) As a result, savings rates “for whites and Asians with auto enrollment are about 0.5 to 2 percentage points higher than those for blacks and Hispanics,” the report says.
Why do whites and Asians save more? (The report found that Asians saved the most among the four groups.) Stephen Utkus, head of Vanguard’s Center for Retirement Research, says the researchers controlled–or adjusted–the data to account for differences in income, wealth, age, and job tenure among the four groups. His best guess? “Cultural differences” or gaps in financial literacy could explain the lower savings rates for blacks and Hispanics.
How can 401(k) sponsors close the gap in savings rates? One solution may be to implement automatic escalation–a feature that increases employee savings rates by a set amount, typically one percentage points a year, until reaching a certain threshold.
Still, Mr. Utkus says, “It’s a big question as to whether auto-escalation features will help.” “We have such limited data. On average, people in plans that automatically escalate contributions have experienced only one automatic increase thus far.” As a result, he adds, it’s too soon to know whether employees of different racial and ethnic groups whose contributions are automatically escalated will behave in a similar way–for example, by sticking with the higher contribution rates–or not.