The number of employers offering automatic enrollment options in their 401(k) defined contribution plans has zoomed in recent years, and the trend will likely continue.
According to the Profit Sharing/401(k) Council of America, the number of large companies with at least 1,000 employees that offered auto enrollment programs in their 401(k) plans topped 50% last year, up from 17% in 2001.
And the face of these programs is changing, too. Initially, the primary default option in these plans were fixed investments such as money market funds. But fixed investments comprised just 7% of default options in 2007, according to the 401(k) Council. The largest default option last year were target-date funds, at 48.7%.
Major mutual fund companies such as Fidelity, T. Rowe Price and Vanguard all report higher automatic enrollment participation rates at the 401(k) programs they administer. In a recent Vanguard report on Americans' saving patterns, the company said more than 300 of the defined contributions plans it administers used automatic enrollment last year, or triple the rate in 2005. That represents 15% of the plans administered by Vanguard, covering one-third of Vanguard's total participant population. Of the plans that have automatic enrollment, two-thirds also have automatic annual increases in savings rates, up from one-third in 2005.
Vanguard attributes much of the healthy uptick in auto enrollment programs to the tax and fiduciary incentives included in the Pension Protection Act of 2006. But David Wray, president of the Profit Sharing/401(k) Council of America, believes such assumptions are inaccurate.
"The move into auto enrollment programs at large companies was well under way when the Pension Protection Act was passed," he says. "The act gave it momentum and permitted some companies to overcome internal objections such as whether these programs were even legal."