How Automatic Enrollment Affects the Likelihood and Distribution of 401(k) Contributions: Evidence from a National Survey Barbara Butrica and Nadia Karamcheva Urban Institute August 7, 2014

Background and Question Automatic enrollment has been shown to increase participation in 401k plans. Empirical evidence from three main sources: Firm-level case studies: may not generalize to larger population of workers Proprietary plan-level data: mostly large plans and may not represent all covered workers Firm-level national data: lacks demographic information to analyze participant behavior We use individual-level data from a nationally representative survey to look at how autoenrollment is related to the likelihood and distribution of 401(k) contributions. 2

Data: Health and Retirement Study Nationally representative survey of adults ages 51 and older. Tracks information on personal characteristics, employment, earnings, income, financial assets, and pensions. In 2006, the HRS began asking household respondents about automatic enrollment. Because these questions changed between the 2006 and 2008 waves, our analysis uses pooled data from only the 2008 and 2010 waves. Analysis includes workers ages 55 to 69 who are not self-employed. 3

New hires and low earners are most likely to be offered a DC plan with autoenrollment 4

Autoenrolled workers are more likely to be included in DC plans—especially new hires and low earners 5

Autoenrolled workers are less likely to participate in DC plans—except new hires and low earners 6

Median contributions are lower among autoenrolled workers than opt-in workers 7

Among participants, however, there is no statistical difference in contribution amounts between autoenrolled and opt-in workers 8

Median contribution rates are lower among autoenrolled workers than opt-in workers 9

Again, for those participating there is no statistical difference in contribution rates between autoenrolled and opt-in workers 10

Controlling for other factors, autoenrollment increases the likelihood of being included in a DC plan—especially for new hires 11

However, autoenrollment is associated with a decline in DC participation—except for new hires and low earners 12

Furthermore, autoenrolled workers contribute less to DC plans than opt-in workers 13

Among DC participants, contributions of those autoenrolled are not statistically different from those who opt in 14

Autoenrolled workers also have lower DC contribution rates than opt-in workers—no differences by tenure or earnings 15

Among workers who participate in DC plans, contribution rates of those autoenrolled are not statistically different from those who opt in 16

Conclusions Relationship between automatic enrollment and DC contributions may be more ambiguous than originally expected. Autoenrollment increases likelihood of being included in a DC plan for all workers, but increases likelihood of participating only for new hires and low earners. Reduces probability of participation for old hires. 17

Conclusions (continued) Automatic enrollment is associated with lower contributions and contribution rates Large share of autoenrolled workers does not contribute to their plans. So controlling for positive contributions, there is no statistically significant difference between workers. Autoenrollment has no effect on the contributions of new hires and is associated with a reduction in contributions among old hires. 18

Policy Recommendations Autoenrollment appears effective at increasing participation among new hires and low earners. Needs to do better job of keeping old hires and boosting overall contribution levels among participants. Possible ways to achieve this might be: Autoescalation More generous employer match 19

Future Research Examine how autoenrollment affects workers’ participation and contributions, controlling for various life events. Estimate quintile regressions to examine whether the effect of automatic enrollment changes throughout the distribution. Use information on employer contributions to derive a more complete measure of DC savings and analyze the relationship between total worker and employer contributions and autoenrollment. 20