Automatic Enrollment, Reenrollment, and Retirement Outcomes

Millions of Americans who otherwise might not be saving for retirement have been enrolled by their employers into their 401(k) plans through automatic enrollment, and it has transformed the way that many Americans save for retirement. Plan sponsors have embraced the use of automatic enrollment as a means of creating employee engagement with retirement savings and promoting healthy financial behavior—saving for retirement. In the 15 years since the Pension Protection Act (PPA) was passed, T. Rowe Price has seen adoption of automatic enrollment almost double, and roughly three-quarters of the large market plans (>USD 25M) it recordkeeps have adopted it.

The default deferral percentage can also play a significant role in helping employees achieve financial security in retirement. When the PPA was enacted in 2006, the most common default deferral percentage was 3%, which was used by 61% of the plans recordkept by T. Rowe Price. As of year-end 2021, only 28% of plans were still using a 3% deferral default. In contrast, employers adopting at least a 6% deferral default has risen from 4% in 2006 to 36% today.

Some may argue that the use of higher deferral defaults has been driven in large part by plan sponsors seeking to avail themselves of the safe harbor afforded to Qualified Automatic Contribution Arrangements. Despite the safe harbor, critics warn that higher default contribution rates lead to more participants choosing to opt out of plan participation. Our experience suggests that such concerns are unwarranted.

T. Rowe Price analysis of participants who were automatically enrolled in their employers’ plans in 2021 reveals that less than 6% opted out. Moreover, the percentage who opted out was similar if the default was 3% or the default was ≥6% of wages. Similarly, almost 90% of participants automatically enrolled in 2021 kept their investments in the Qualified Default Investment Alternative (QDIA) chosen by their employer. Collectively, these findings point to the power of nudges to influence behavior but raise the question of whether they go far enough or could serve a greater social purpose.

Who Benefits From Automatic Enrollment?

It is often assumed that everyone benefits from automatic enrollment, but new research suggests that may not exactly be the case. Taha Choukhmane, Ph.D., a behavioral economist at MIT Sloan School of Management, sought to answer this question by analyzing T. Rowe Price recordkeeping data and comparing participant saving behaviors 12 months prior to and 36 months after implementation of automatic enrollment. He found that for most participants, automatic enrollment does not affect their long-term savings or wealth accumulation. For many, they simply catch up by saving more in the future. However, for lower paid and/or younger participants, the impact can be significant. For these participants who otherwise would not save, automatic enrollment gets them started (see Savings Rates: Automatic Enrollment vs. Opt In). By saving earlier in their careers, they potentially benefit from additional years of saving and compounded investment returns.

So if everyone is not benefiting equally from 401(k) plans or automatic enrollment, then who is being left behind and what can be done about it? To understand this, we must consider how automatic enrollment and other behavioral finance techniques might benefit groups that have historically had lower rates of access to 401(k) plans, lower levels of participation, or lower savings rates (as a percentage of wages).

Bringing an Equity Lens

T. Rowe Price analysis of the U.S. Census’ 2021 Annual Social and Economic Supplement of the Current Population Survey found that both Black and Hispanic workers were less likely to have access to 401(k) plans than their white counterparts. Further, as part of its 7th annual Retirement Savings and Spending Study, T. Rowe Price surveyed 401(k) participants and asked them when they first started to save for retirement. The data show that white participants tend to start saving much earlier than their Black and Hispanic counterparts. In fact, 38% of white respondents claimed to have started saving before the age of 30 compared with 18% and 29% for Black and Hispanic respondents, respectively. Worse, more than one-third of Black and Hispanic 401(k) participants don’t start saving for retirement until after the age of 40. Getting people to save early and often is clearly something automatic enrollment is well positioned to effect if one has access to a plan. Having access to a plan is the first step, but is it enough?

Reenrollment Complements Automatic Enrollment

It is often said that saving for retirement is akin to running a marathon. The key to finishing a marathon or saving for retirement is picking a pace that one can sustain to the finish line. Like running a race, saving enough for retirement is easier if you don’t stop. Unfortunately, we learned in our 2021 Retirement Savings and Spending Study that not only do many 401(k) participants start saving late, but approximately one-third of the participants we surveyed either stopped saving or reduced their deferrals at some point. Automatic enrollment does a great job of getting people into the race but often falls short of helping them to finish it. To finish the race, we look to reenrollment.

Automatic enrollment and reenrollment are very similar as they both enroll participants in retirement plans at a default contribution rate and investment fund. Where they differ is in practice. Typically, automatic enrollment engages workers as they become eligible for their employers’ retirement plan. In contrast, reenrollment is very flexible and can be used to engage workers who have chosen not to participate or who could benefit from resetting their savings rate or investment allocations. Moreover, reenrollment can be used both tactically and strategically to affect specific groups of employees (e.g., nonparticipants) or the whole plan (e.g., QDIA reenrollment).

The Effects of Automatic Enrollment and Reenrollment Last a Lifetime

Saving for retirement is a long-term pursuit. Dr. Choukhmane’s research suggests that engaging those who are least likely to save for retirement can have a significant effect on retirement outcomes. Using the safe harbor 6% default as the baseline, the research estimates lifetime wealth accumulation, factoring employment, taxes, personal preferences and biases, demography, and financial decision-making. It compared the data of those who were automatically enrolled in their employer’s plan with those who had to proactively choose their contribution amount. The estimate assumes the default is invested in hypothetical target date portfolios that replicate the asset allocation of T. Rowe Price’s proprietary glide path.

The analysis showed that both younger and lower-paid workers can benefit from defaults and investing in a target date portfolio. More specifically, the workers who were automatically enrolled could hypothetically accumulate almost 40% more in lifetime wealth compared with those who proactively opted into their employer’s plan.

While the benefits of automatic enrollment are less significant to higher-wage earners, the results highlight how both low-wage earners and those who have opted out of enrolling in their employers’ plan could benefit from being reenrolled.

Using Plan Design to Effect Outcomes

The challenge employers face is that ideal 401(k) plan designs should reflect what’s most effective for participants throughout a working time horizon.

However, employment tenures can be much shorter. Dr. Choukhmane’s research sheds new light not only on employee behavior, but also highlights the varying choices employers might consider to ensure that more employees could benefit from 401(k) plans by demonstrating the potentially beneficial effects of enrolling younger and lower-wage workers and ensuring persistent participation in 401(k) plans.

Since the passage of the PPA, there has been great focus on encouraging plan sponsors to adopt automatic enrollment and escalation. Unfortunately, the benefits and impact of reenrollment has taken a secondary position in the conversation. Reenrollment and its benefits of participation, adequate savings, age, and risk-appropriate investing can play an important and necessary role in pursuing the goal of 401(k) plans providing greater financial security to participants as they transition from working to retirement.