Veritas propter investigationem [Truth through research]
TitleAutomatic Enrollment, Employee Compensation, and Retirement Security (2012)
AuthorsBarbara Butrica
 Nadia Karamcheva
InstitutionCenter for Retirement Research
TopicsAuto-enrolment, opt-out
 Behavioural economics
 HR issues
 Remuneration issues
 Workplace saving schemes
CountryUnited States
Date Published2012
Date posted on PR15 Jul 2014
Butrica, B Karamcheva, N, (2012). Automatic Enrollment, Employee Compensation, and Retirement Security (2012) Center for Retirement Research,

PensionReforms’ summary and comments

In the US, ‘auto-enrolment’ refers to the way in which employees become members of Tier 3, occupational saving schemes.  PensionReforms has suggested that employers (and employees) respond rationally to such arrangements (see here for example).  We should expect, for example, that the average contribution per employee would be lower where there was a higher participation rate because of auto-enrolment. 


This 2012 report raises some flags about the usual statistics that have been cited in support of auto-enrolment.  It suggests that too much focus has been on how more employees become members and contribute more into ‘more appropriate’ investment strategies.  But how does this all affect the way employers behave?


“By boosting plan participation, automatic enrollment likely increases employer costs as previously unenrolled workers receive matching retirement plan contributions.  Employers might respond to the surge in retirement plan costs associated with automatic enrollment by trimming match rates to 401(k) plans or reducing other compensation.”


The report’s findings are unsurprising:

“…we find employer match rates are negatively and significantly correlated with auto enrollment.  The potential match rate averages 3.5 percent for plans without automatic enrollment, but only 3.2 percent for those with automatic enrollment.  Even controlling for other factors, we find that the potential match rate is 0.38 percentage points lower for firms with automatic enrollment than for those without this provision.”


The report notes that, while the difference might seem relatively small,  “…it is potentially bigger when one considers that the average default match rate in our sample is only 1.8 percent.  Thus, on average, firms in our sample are defaulting their workers at a contribution rate at which workers cannot take full advantage of the employer match.”


The report also found that other components of compensation seem unaffected (as between firms with and without auto-enrolment) so suggesting that “…firms might be lowering their match rates—the potential and/or the default—enough to completely offset the higher costs of automatic enrollment without needing to simultaneously reduce other compensation costs.”


The report summarises the impact of auto-enrolment: higher work-place savings for those employees who would not have joined but at the expense of lower contributions for other members and also possibly lower member contributions overall because of the smaller matching rates.


PensionReforms thinks that employers will decide how much in total they are prepared to put into the compensation ‘pot’ and that will be sufficient to get the various jobs done.  If public policy ‘insists’ that part of that compensation is delivered in a particular way, we should expect that to be at the expense of ‘non-mandated’ components.  The report suggests that employers are making overall decisions that suit their business objectives.  They are probably not consciously trading the extra costs of auto-enrolment off against match rates but that is what seems to be happening in practice.


All this ignores whether employees themselves might be offsetting their occupational saving scheme balances against their other financial savings – whether, for example, those who join as a result of auto-enrolment (when they might otherwise have not joined) save less elsewhere.  But, based on what we know from just the occupational schemes, auto-enrolment seems to be a zero-sum game.  That’s as we might expect. (File size 275 KB; 45 pp) 688