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

Listed author(s):
  • Barbara A. Butrica
  • Nadia S. Karamcheva

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.

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Paper provided by Center for Retirement Research in its series Issues in Brief with number ib2013-14.

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Length: 7 pages
Date of creation: Oct 2013
Handle: RePEc:crr:issbrf:ib2013-14
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