Senate Bill 35: Allowing Automatic Enrollment in Employee Retirement Plans House Business Affairs and Labor Committee

Allowing Automatic Enrollment in Employee Retirement Plans
House Business Affairs and Labor Committee

February 2, 2010

Rich Jones
Director of Policy and Research
The Bell Policy Center

Summary

The Bell Policy Center supports Senate Bill 35 to allow Colorado employers that are exempt from the Employee Retirement Income Security Act (ERISA) to offer automatic enrollment in employee retirement plans. Research has demonstrated that automatic enrollment in defined contribution plans such as 401(k) plans has resulted in a greater percentage of workers participating in these plans. In particular, automatic enrollment has significantly increased participation among lower-income and younger workers, who historically participate in these plans at much lower rates than other employees.

Background on Retirement Policy

Colorado workers will need to rely on workplace pensions, personal savings and Social Security benefits to replace their earnings when they retire. However, only four out every ten Colorado workers have employer-provided retirement benefits. (1) National data indicates that when private-sector employers provide retirement plans, the vast majority offer defined contribution plans such as 401(k) plans. Most of these plans require workers to "opt in" and decide how much of their pay to contribute and choose among a range of options to invest these funds. Many workers delay deciding to enroll in these plans out of inertia, procrastination and confusion over investment choices, or other reasons. (2)

The U.S. Pension Protection Act of 2006 authorized retirement plans provided by employers subject to the Employee Retirement Income Security Act (ERISA) to offer automatic enrollment. Automatic enrollment allows employers to enroll workers in a defined contribution plan, deduct a predetermined portion of an employee's salary and deposit it in a designated investment vehicle. Employees can "opt out" of the plan if they do not want to participate or make other changes in the amount deducted or investments selected.

However, not all retirement plans are covered by ERISA. Government employers, churches or entities owned by churches such as hospitals are not covered. Current Colorado law limits the ability of employers to make deductions from employee wages if they are not specifically authorized (CRS 8-4-105). This prevents employers who are not covered by ERISA from offering automatic enrollment in defined contribution retirement plans. Senate Bill 35 would allow all Colorado employers to offer automatic enrollment in retirement plans.

Research Shows Automatic Enrollment Increases Participation

Research shows that automatic enrollment can substantially increase the number of employees who participate in an employer's defined contribution retirement plan. In some cases the participation rates under automatic enrollment reached as high as 95 percent of employees. The Government Accountability Office (GAO) reviewed six studies that compared the effects of automatic enrollment. They found that automatic enrollment not only increased the overall number of workers that participated in the retirement plans but also increased participation among lower-income and younger workers. (3) Workers who have historically participated in lower rates than other workers.

For example, Fidelity Investments compared participation rates for eligible employees in plans with automatic enrollment to those without it. They found that 53 percent of eligible employees participated in the plans without automatic enrollment compared to 81 percent for the plans with automatic enrollment. They also found that 30 percent of workers aged 20 to 29 participated in plans without automatic enrollment, but 77 percent of workers in that age range participated in plans with automatic enrollment. (4)

In another study, conducted by researchers at the University of Pennsylvania and cited by the GAO, plans with automatic enrollment increased participation among employees earning $20,000 or less from 13 percent up to 80 percent. They also found that participation rates for Hispanic and black employees increased under automatic enrollment from 19 percent and 22 percent, respectively, to 75 percent and 81 percent. (5)

The number of defined contribution plans that have automatic enrollment has grown in recent years, with larger plans more likely to offer this option. Fidelity Investments' data shows that about 1 percent of plans had automatic enrollment in December 2004 and 16 percent offered it in March 2009. Vanguard shows that the portion of defined contributions plans has increased from 8 percent in June 2006 to about 19 percent in December 2008. A Profit Sharing/401(k) Council of America survey of 401(k) plans found that 24 percent offered automatic enrollment in 2006 up from 4 percent in 1999. (6) Because plans that cover more workers tend to offer automatic enrollment, about 47 percent of all plan participants are included in plans that offer automatic enrollment according to Fidelity's data. (7)

Endnotes

(1) Opportunity Lost: 2009 Update, The Bell Policy Center, forthcoming January 2010. p. 18.
(2) Automatic Enrollment Shows Promise for Some Workers, but Proposals to Broaden Retirement Savings for Other Workers Could Face Challenges, U.S. Government Accountability Office, GAO-10-31, October 2009. p.10.
(3) Ibid, pp. 11-12.
(4) Building Futures Volume VIII: A Report on Corporate Defined Contribution Plans, Fidelity Investments, 2007 as cited in Automatic Enrollment Shows Promise for Some Workers, GAO-10-31.
(5) The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, Bridgette Madrian and Dennis Shea, Quarterly Journal of Economics, Vol. 116, No. 4, November 2001, 1149-87.
(6) Annual Survey of Profit Sharing and 401(k) Plans, Profit Sharing/401(k) Council of America, 1999-2006.
(7) Automatic Enrollment Shows Promise, GAO-10-31. pp 14-15.