Enrolling employees in the company 401(k) plan involuntarily is a surefire way to boost participation rates, a new study reports, but it also creates a group of investors who don't manage their plans well.
The survey, conducted by human-resources consulting firm Hewitt Associates, finds that when companies automatically enroll new employees in their 401(k) plans, 91 percent continue to participate. Companies that rely on voluntary enrollment experience a participation rate of just 68 percent.
However, employees who are enrolled automatically are not the most active investors. They tend to leave their investments in overly conservative funds, are less likely to rebalance their portfolios, and contribute less on average than those who opt in to the plan through traditional means.
"While automatic enrollment is proving to be an effective tool for getting employees into the 401(k) plan, it isn't a cure-all for helping people meet their retirement needs," says Pamela Hess, director of retirement research at Hewitt. She says companies should avoid setting the default contribution rate too low and should encourage automatically enrolled investors to diversify their holdings.
Automatic enrollment: 91%
Voluntary enrollment: 68%
Automatic enrollment: 6.8%
Voluntary enrollment: 8.0%
Investments in Equity
Automatic enrollment: 48%
Voluntary enrollment: 67%
(Made at least 1 transfer in 2005)
Automatic enrollment: 9%
Voluntary enrollment: 18%
Source: Hewitt Associates