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CCH® PENSION AND BENEFITS — 08/05/09

Auto-enrollment has biggest impact on young, lower paid employees according to Fidelity

The adoption of automatic enrollment provisions in 401(k) plans is proving to have the biggest impact on younger and lower-compensated employees, according to research by Fidelity Investments. "Auto enrollment is doing exactly what it was intended to do," said Scott B. David, president, Workplace Investing, Fidelity Investments. "It is driving many Americans who would have otherwise not saved — mostly the young and lower-paid employees — to begin saving early and consistently which is critical to having a healthy income in retirement."

Fidelity data of auto enrolled participants showed that over half (52%) were between the ages 20 and 34. By comparison, only 13% of participants that were auto enrolled were between the ages of 50 and 64. The impact of auto enrollment on older participants is not as significant as many are either already participating or elect to enroll on their own. Data also showed that the majority (56%) of participants that were enrolled automatically made less than $40,000 a year. Among the participants that were auto enrolled, only 10% had higher salaries, ranging from $80,000 to $150,000 a year.

Few employees opt out

Fidelity's analysis of workers eligible for automatic enrollment showed that only one in 10 proactively opt out of the plan. The average participation rate in Fidelity plans that do not use auto enrollment is about 60%. That rate increases dramatically to 90% participation for plans that adopt auto enrollment for both new and existing employees.

"There is no doubt that auto enrollment has helped many new hires, especially younger workers, get started on their way to saving," David said. "However," he added, "most companies only auto enroll new employees and need to make the feature available to existing employees as well, in order for auto to have a more significant impact."

Most employees accept default deferral rate

Fidelity research also showed that workers overwhelmingly either accept the default deferral rate set by the employer or elect to increase it regardless of how high the rate. An analysis of plans with the most common default deferral rate of 3% showed that 57% of employees keep that contribution rate and an additional 37% elect to increase the rate. In plans with a higher 6% default deferral rate, 60% of employees opt to keep the rate and another 24% elect to increase the amount.

SOURCE: Fidelity Investments press release, July 14, 2009.

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