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How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation?

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Publication Date: October 2013

Publisher(s): Center for Retirement Research at Boston College

Author(s): Barbara Butrica; Nadia Karamcheva

Series:

Special Collection:

Topic: Economics (Economic conditions)
Economics (Economic policy, planning, and development)
Economics (Economic research)
Economics (Infrastructure)

Keywords: Financing retirement; 401(k); Employer match; Compensation

Type: Report

Coverage: United States

Abstract:

Many workers eligible for 401(k) plans fail to par­ticipate and those who do participate often save too little. In response, policy experts have advocated auto-enrollment, in which employees are signed up at a default contribution rate unless they opt out. Over the past decade, a number of employers have adopted auto-enrollment, and these policies have clearly boost­ed participation. But the effect of auto-enrollment on workers’ total 401(k) saving is unclear, because it depends partly on employer decisions about plan design and worker compensation. And these deci­sions could be affected by the increase in employ­ers’ 401(k) matching contributions generated by auto-enrollment. This brief, based on a recent paper, examines the relationship between auto-enrollment and employer decisions on matching contributions and overall compensation.

The discussion proceeds as follows. The first sec­tion considers why and how auto-enrollment could af­fect these decisions. The second section discusses the data used in the analysis. The third section explores whether auto-enrollment is associated with employ­ers’ use of low match rates or low default employee contribution rates. The fourth section examines whether auto-enrollment is related to lower spend­ing on non-401(k) compensation or higher spending on total compensation. The final section concludes that auto-enrollment is associated with relatively low match rates and default rates, but does not affect wag­es or total compensation. This finding suggests that firms with auto-enrollment may offset higher 401(k) participation costs by trimming their per-participant contributions.