Auto-Enrollment’s Little-Known Benefit: Better Participation by Blacks and Hispanics

Plan sponsors and participants both benefit when sponsors automate features of their 401(k) plans. As you might expect, auto-enrollment boosts employee participation. This is particularly effective with black and Hispanic employees, according to a study conducted by the Vanguard Group.

401(k) Auto-Enrollment: Participation May Rise by 30%

Who wouldn’t like to boost plan enrollment by 30%?

This kind of gain is possible, according to a key finding from “Diversity and defined contribution plans: The role of automatic plan features.

“Participation rates under automatic enrollment rise from 57% to 94% for blacks and from 67% to 95% for Hispanics, eliminating most group differences.”

“Group differences” refers to research showing lower savings rates by blacks and Hispanics when compared with whites and Asians. It’s not clear why this gap exists. It may be due to factors other than race and ethnicity, such as income and education, according to research cited by Vanguard.

It’s hard to say whether all plans could achieve such big gains for their black and Hispanic employees. Vanguard’s research focused on seven large, feature-rich defined contribution plans. However, auto-enrollment seems beneficial across the board. Participation by whites and Asians also rose in the plans studied by Vanguard.

One Worry: Lower Deferral Rates

There’s one potential drawback to auto-enrollment. Participants tend to stick with the default rate of salary deferral.

“The average contribution rate drops to 4.4% for participants who were automatically enrolled into their plans, compared with 6% for those voluntarily enrolling. Prior research has shown that participants tend to remain at the default deferral rate recommended by the plan sponsor, and most sponsors set low deferral rates,” according to the Vanguard report. Plan sponsors should consider setting the initial deferral rate higher or automatically raising deferral rates to ease employees up to higher rate of savings.

Deferral rates are important to plan participants saving enough money to retire comfortably. “Higher deferral rates made more of a difference to 401(k) plans’ ending wealth than investment performance and even asset allocation,” as we said in “Deferral Rates Give Biggest Boost to Employee Retirement.

If you have questions about auto-enrollment or any aspect of 401(k) plan investing, Smart Investor would be happy to help you.

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