More and more employers are using automatic enrollment to getemployees to participate in their retirement plans, and it'sworking. A new study from Aon Hewitt, the global human resourcesoutsourcing and consulting company of Aon Corporation, found thatmore employees are participating in employer-sponsored definedcontribution (DC) plans than ever before.

More than three-quarters (76 percent) of eligible employeesparticipated in their company's DC plan in 2010; this is thehighest level since Aon Hewitt began the study in 2002, and is upfrom 74 percent in 2009 and 67 percent in 2005.

The survey analyzed defined contribution saving and investing in more than 3million employees in 120 companies.

Three in five employers automatically enrolled employees intotheir DC plans in 2010, up from just 24 percent in 2006.Auto-enrollment, therefore, is one explanation for the record-highparticipation seen over the past few years.

In fact, the study showed that 85 percent of employees subjectto auto-enrollment participated in their DC plan, 18 percentagepoints higher than those that were not subject to automaticenrollment. However, most companies (85 percent of those offeringautomatic enrollment) only automatically enroll new hires, which iswhy the rise in participation has been so gradual.

"Employers are increasingly concerned that their workers are notadequately prepared to meet their future retirement savings needs,"said Pamela Hess, director of retirement research at Aon Hewitt ina statement. "Automatically enrolling employees incompany-sponsored DC plans is an easy way for companies toencourage workers to save more. However, this really is only anudge in the right direction."

Interestingly, automation may actually hinder the amount ofmoney contributed for those who are automatically enrolled in aplan. The analysis found that before tax contributions to DC planswere unchanged from 2009 at 7 percent of pay, but are still downslightly from pre-recession levels in 2007 (8 percent).Participants who were subject to automatic enrollment, however,contributed one percentage point less, on average, than theiractively enrolled counterparts.

"Saving even just one percent less over a career has a dramaticimpact on accumulation," Hess said. "Ultimately, it can lead tonearly a 15 percent loss in retirement income."

In addition to generally low contribution rates, many workersstill aren't contributing enough to their 401(k) plan to receivematching employer contributions. Overall, 29 percent of planparticipants contributed below the company match threshold, upslightly from 2009 28 percent.

The numbers are worse among participants who were auto-enrolled.Forty-one percent of participants who were automatically enrolledare not saving enough to receive the full match from theiremployers, compared to only 25 percent of participants whoproactively enrolled.

"To drive higher savings rates, companies should considercombining automatic enrollment with automatic contributionescalation and target-date portfolios," Hess said. "Additionally,defaulting workers contribution levels at, or greater than theemployer-match rate will also ensure greater success for employeesstruggling to save for retirement. Employers can also periodicallyback-sweep participants—or automatically enroll any worker who isnot currently participating in the 401(k) plan—to ensure they arereaching all employees on an ongoing basis, rather than only at thepoint of hire."

Other key findings of the study include:

• Cumulatively, workers on average saved 10 percent of pay,including 4 percent from employer contributions.
• The average employee's total plan balance was $76,020 at theend of 2010, while the median balance was $24,680.
• The three largest asset class exposures (equally weighted) werepremixed portfolios (33 percent), large U.S. equity (14 percent)and GIC/stable value funds (14 percent).
• The average worker's overall exposure to equities rose 0.5percentage points in 2010, up from 66.9 percent in 2009.
• The median rate of return earned by employees in 2010 was 14percent, down from 24 percent in 2009. The median, annualized,three-year rate of return earned (from 2008-2010) was just 2percent, illustrating the dramatic impact losses in 2008 had onparticipant results.
• When available, 60 percent of workers invested at leastpartially in premixed portfolios, mainly driven by the popularityof target-date funds. Among those using premixed portfolios, justunder half (46 percent) were fully invested in a single portfolio.
• Despite strong market returns in 2009, only 14 percent ofemployees made any sort of fund transfer in 2010, down from 16percent in 2009.
• Nearly three in ten participants (28 percent) had a loanoutstanding at the end of 2010, the highest in the ten years thatAon Hewitt has been tracking loans.
• In 2010, 6.9 percent of workers took a withdrawal from their DCplan, close to the record high of 7.1 percent in 2009. Among these,20 percent were hardship withdrawals.