How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation?
Publication Date: October 2013
Publisher(s): Center for Retirement Research at Boston College
Keywords: Financing retirement; 401(k); Employer match; Compensation
Coverage: United States
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.