By Mark Miller

June 12 - So much for the notion that workers will drop out of their workplace retirement savings plan if employers automatically enroll them at aggressive contribution rates.

That's been the often-heard excuse for auto-enrollment rates in 401(k) plans averaging 3 percent. But a study released on Tuesday by New York Life Retirement Plan Services found that workers in plans with higher default initial contribution rates are more likely to stay in their plans, increase their contribution rate and personally manage their investment choices.

Plans with less than 4 percent default rates experienced a 14 percent opt-out rate, compared with 10 percent for plans with greater than 3 percent default deferrals, the study said.

Automatic enrollment has exploded since the passage of the Pension Protection Act of 2006, which contained provisions aimed at boosting participation rates. It's having a positive impact. A record 76 percent of U.S. workers participated in a defined contribution plan during 2011, according to a new report released on Tuesday by Aon Hewitt.

Retirement readiness also is improving, Aon Hewitt found. The study projects that the average worker will need 11 times his final pay in retirement resources; average workers are on track to accumulate 8.8 times final pay, leaving a shortfall of 2.2 times pay. Still, that was a small improvement compared with 2010, when the shortfall was 2.4 times pay.

But low default initial contribution rates are a persistent problem. Sixty-six percent of workplace plans with automatic enrollment set a default contribution rate of 3 percent or less, according to Aon Hewitt. Employers know there's a problem here: 70 percent of plan sponsors recommend that workers contribute at least 9 percent of income.

WHY THE GAP?

One reason may be employer caution, says David Castellani, CEO of New York Life Retirement Plan Services. "In the early days of default enrollment, there has been some timidity - plan sponsors decided to start off with lower numbers," he said.

But a more important factor is the increased cost of employer matches that accompanies higher worker contributions, says Robyn Credico, leader of the defined contribution practice at Towers Watson, the benefits consulting firm.

Originally posted here:
Retirement savers stay put when employers boost contributions