NEWS
Aon Hewitt Study Shows Record-High Participation in Defined Contribution Plans Driven by Automatic Enrollment
As more employers use automatic enrollment, a new study from Aon Hewitt reveals that employees are participating in employer-sponsored defined contribution (DC) plans at a record high rate.
24 May 2011

Lincolnshire | Aon Hewitt's analysis of DC saving and investing behaviors of more than 3 million employees across 120 large companies, shows that more than three quarters (75.8 percent) of eligible employees participated in their company's defined contribution plan in 2010 — the highest level since Aon Hewitt began tracking this data in 2002. This is up from 73.7 percent in 2009 and 67.2 percent in 2005.

This record-high participation rate is due in large part to the rapid adoption of automatic enrollment. Three in five employers automatically enrolled employees into their defined contribution plans in 2010, up from 24 percent in 2006. For employees who were subject to automatic enrollment, Aon Hewitt's analysis found that 85.3 percent participated in their DC plan, 18 percentage points higher than those that were not subject to automatic enrollment. However, most companies (85 percent of those offering automatic enrollment) only automatically enroll new hires, resulting in the gradual uptick in participation rates.

"Employers are increasingly concerned that their workers are not adequately prepared to meet their future retirement savings needs," explained Pamela Hess, director of retirement research at Aon Hewitt. "Automatically enrolling employees in company-sponsored DC plans is an easy way for companies to encourage workers to save more. However, this really is only a nudge in the right direction."

Aon Hewitt's analysis also found that before tax contributions to DC plans were unchanged from 2009 at 7.3 percent of pay, but are still down slightly from pre-recession levels in 2007 (7.7 percent). For workers that are automatically enrolled in the plan, automation may actually hinder the amount of money they are contributing. Participants who were subject to automatic enrollment contributed one percentage point less, on average, than their actively enrolled counterparts (6.8 percent, compared to 7.8 percent). This significant gap is due to low default rates among the bulk of employers. More than three quarters of plans (76 percent) default contribution rates at 4 percent or less.

"Saving even just one percent less over a career has a dramatic impact on accumulation," cautioned Hess. "Ultimately, it can lead to nearly a 15 percent loss in retirement income."

In addition to generally low contribution rates, many workers still aren't contributing enough to their 401(k) plan to receive matching employer contributions. Overall, nearly three in ten (29.4 percent) of plan participants contributed below the company match threshold, up slightly from 2009 (28.2 percent).

Among participants who were defaulted, this picture is bleaker. Forty-one percent of participants who were automatically enrolled are not saving enough to receive the full match from their employers, compared to only 25 percent of participants who proactively enrolled.

"To drive higher savings rates, companies should consider combining automatic enrollment with automatic contribution escalation and target-date portfolios," explained Hess. "Additionally, defaulting workers contribution levels at, or greater than the employer-match rate will also ensure greater success for employees struggling to save for retirement. Employers can also periodically back-sweep participants—or automatically enroll any worker who is not currently participating in the 401(k) plan—to ensure they are reaching all employees on an ongoing basis, rather than only at the point of hire."

Other Key Findings

Source : Aon Corporation