Automatic employee enrollment into a company 401(k) plan raises participation for all racial and ethnic groups, according to a new study by Vanguard. The increase is particularly notable for blacks and Hispanics, especially those who earn low wages, the report said.
"This study confirms that the use of automatic plan design does reduce racial and ethnic disparities in saving and investing behavior through defined contribution retirement plans," said Cyndy Pagliaro, a Vanguard researcher and lead author of the report, which is the first in a series examining diversity and defined contribution plan savings. "Plan sponsors concerned about these disparities should consider automatic plan design, but it must be carefully planned to ensure adequate long-term retirement savings for all groups."
"In Diversity and Defined Contribution Plans: The Role of Automatic Plan Features" takes an in-depth look at the effect of automatic enrollment into 401(k) and other defined contribution plans. What it found is that auto enrollment boosts the number of blacks who enroll from 57 percent voluntary to 94 percent in the automatic enrollment, an increase of more than 60 percent. The Hispanic participation rate also jumps, from 67 percent under voluntary enrollment to 95 percent through automatic enrollment. Auto enrollment also boosts participation rates of Asians and whites.
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The report found that auto enrollment is very important for low-income blacks and Hispanics, who are far less likely to participate in a defined contribution plan under voluntary enrollment. "The participation rate in voluntary enrollment plans among black workers earning less than $30,000 a year is only 35 percent; it is 36 percent for Hispanic workers in the same income group. These rates jump to 93 percent and 94 percent, respectively, under automatic enrollment."
Whites and Asians are more likely to override their plan's default deferral rate and choose a higher one, the research found. As a result, deferral rates for whites and Asians with auto enrollment are about 0.5 to 2 percentage points higher than those for blacks and Hispanics. The researchers noted that an automatic escalation of deferral rates raises them across the board and over time may also mitigate differences in plan savings rates among these groups.
Auto enrollment plans many times default participants into an automatic investment program, such as a target-date fund. These types of funds reduce many of the "extreme asset allocations seen in voluntary enrollment plans," the researchers found. In voluntary plans, whites and Asians are more likely to be aggressive equity investors, while blacks are more apt to be zero-equity investors. By smoothing those allocations, a target-date fund reduces differences in risk taking among these groups, the report found.
Vanguard analyzed 2010 data for more than a quarter million participants in seven large defined contribution plans with auto enrollment plan features to come up with its report.
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