Nearly Half of Employers Now Auto-Enroll Employees in 401(k) Plans, Watson Wyatt Survey Finds

WASHINGTON, Sept. 23 /PRNewswire-FirstCall/ -- In a trend that is likely to continue, nearly half of U.S. companies are automatically enrolling workers into 401(k) plans to encourage them to save for retirement, according to a survey by Watson Wyatt, a leading global consulting firm. The survey also found that the number of companies that use target-date or lifecycle funds as their default investment option has increased sharply in the last few years.

"Employees need to participate more effectively in their company defined contribution plan as this is increasingly the primary vehicle they use to save for retirement," said Chris DeMeo, senior investment consultant at Watson Wyatt. "Taking an interest and actively participating in their plans will allow employees to make more informed decisions and develop investment strategies that take into account their goals and risk profiles."

The survey found that nearly half of surveyed companies (47 percent) now auto-enroll their employees into their defined contribution (DC) plan. Additionally, one-third of those that do not currently auto-enroll are considering it. Watson Wyatt's survey was conducted in March and April 2009, and includes responses from 149 mainly large companies, representing a total of more than 2 million employees across a broad range of industry sectors.

Nearly all companies (96 percent) have a default investment option. The number of companies using lifecycle or target-date funds as their default investment option has increased significantly, from 38 percent in 2006* to 62 percent today. More than 10 percent still offer stable value and money market funds as their default, despite Department of Labor (DOL) regulations issued in 2007 that stated that these options would not be given fiduciary protection.

Plan sponsors that auto-enroll their employees use a median initial contribution rate of 3 percent, with a range from 1 percent to 7 percent. Slightly more than half (51 percent) of the plan sponsors that auto-enroll also automatically increase the contribution rate by a certain amount each year for their participants. The final contribution rate is between 3 percent and 20 percent, with a median rate of 6 percent.

"While plan sponsors have made progress towards encouraging greater participation, saving and educated decision making, there is still room for improvement," said Robyn Credico, senior retirement consultant at Watson Wyatt. "Designing the optimum plan is tricky and requires plan sponsors to juggle many factors including overall plan design, investment, communication and governance. However, the potential upside is great and could cause DC plans to emerge stronger from the current economic crisis."