Auto enrolment driving factor
As more employers in the United States use automatic enrolment, employees are participating in employer-sponsored defined contribution (DC) plans at a record high rate, according to a study by Aon Hewitt.
More than three-quarters (75.8 per cent) of the three million employees across 120 large companies analyzed 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 per cent in 2009 and 67.2 per cent in 2005.
This record high participation rate is due, in large part, to the rapid adoption of automatic enrolment, said Aon Hewitt. Sixty per cent of employers automatically enrolled employees into their defined contribution plans in 2010, up from 24 per cent in 2006. For employees who were subject to automatic enrolment, 85.3 per cent participated in their DC plan, 18-percentage-points higher than those not subject to automatic enrolment, found the study.
However, most companies (85 per cent of those offering automatic enrolment) only automatically enrol 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," said 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."
Before-tax contributions to DC plans were unchanged from 2009 at 7.3 per cent of pay, but are still down slightly from pre-recession levels in 2007 (7.7 per cent). For workers that are automatically enrolled in the plan, automation may actually hinder the amount of money they are contributing, said Aon Hewitt.
Participants who were subject to automatic enrolment 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 per cent) default contribution rates at four per cent or less.
"Saving even just one per cent less over a career has a dramatic impact on accumulation," said Hess. "Ultimately, it can lead to nearly a 15-per-cent loss in retirement income."