Context

Existing research has documented the large impact that automatic enrolment has on savings plan participation. All the companies examined in these studies, however, have combined automatic enrolment with an employer match. This raises a question about how effective automatic enrolment would be without a direct financial inducement not to opt out of participation. This paper for the National Bureau of Economic Research (NBER) in the USA aims to address how effective automatic enrolment might be in the absence of an employer match.

The study

The study estimates the employer match’s impact on savings plan participation under automatic enrolment in two ways. Firstly it studies a large firm which, until December 2003, made matching contributions at a rate of 25% on employee contributions up to 4% of pay, with a maximum contribution rate of 25% of pay. On January 1, 2004, the company replaced this with an employer contribution of 4% of pay plus an annual profit-sharing contribution and reduced the maximum employee contribution rate to 15% of pay. The study’s “match cohort” contained 293 plan-eligible employees hired between January 2002 and June 2003. The “no-match cohort” contained 352 plan-eligible employees hired between January 2004 and June 2005.

The second analysis uses data identical in structure to the first, pooling employees from nine companies with match rates varying from none to 133% match on the first 6% of pay.

Key findings

Using two estimation strategies (detailed in the full report) the authors find that:

• Participation rates under automatic enrolment decline only modestly (by an estimated 5-11 percentage points) when the employer match is eliminated or reduced. The success of automatic enrolment at increasing participation in employer-sponsored savings plans does not appear to rely much on having an employer match. Thus, it is likely that automatic enrolment will also be effective at increasing participation in other contexts that do not naturally lend themselves to a matching contribution.
• Results also suggest that companies with automatic enrolment need not offer a match in order to achieve broad-based participation. However, the employer match may be valuable for reasons other than the inducement that it creates to participate.

Points to consider

• The methodology applied to produce the analysis is described.
• This is an academic research paper from 2007 focusing on specific practice in a sample of US companies. The study focuses on 401(k) retirement savings plans and so may have limited generalisability to other countries and schemes.