(Dow Jones) While automatically enrolling employees into 401(k) plans increases participation, it also may have some unintended side effects.

One study suggests that, as automatic enrollment swells the ranks in a company's retirement plan, the company may cut back on how much of a worker's contribution it is willing to match, so that its own expenses don't rise.

"Auto-enroll is a good thing, but it's not free for employers," says Barbara A. Butrica, a senior research associate in the Income and Benefits Policy Center at the Urban Institute. She co-authored the paper this month that found evidence of companies reducing their match rate "to offset the costs of automatic enrollment."

Not every study agrees with that finding. New research by the nonprofit Employee Benefit Research Institute found that companies that implemented automatic enroll in fact had a higher company match, and a higher non-elective contribution in 2009 than 2005.

But the institute's research director, Jack VanDerhei, suspects that some of that money being pumped into 401(k) matches is coming, in many instances, from cutbacks in a company's fixed pension program. "It's probably coming in large part from defined benefit freezes," he says.

Use of automatic enrollment has climbed significantly since it was given the green light by the Pension Protection Act in 2006. A survey released in November by consulting firm Hewitt Associates found that 58% of the plans now do it, typically with new employees, compared with 34% in 2007.

Participation is dramatically higher at those plans: A Vanguard report found that, in 2008, 84% of employees in plans with automatic enrollment participated in their company 401(k) plan compared with only 60% in plans where workers had to choose to join the plan.

That's good, but automatic enrollment usually sets a relatively low rate of savings by the employee, and that can create another problem.

"If you auto enroll at 3%, most new employees stay at 3%, including the people who would have saved at a higher rate," says Stephen Utkus, head of Vanguard Center for Retirement Research. Financial advisers agree that, for most people, the rate needs to be at least 9% to 12% for many years to ensure adequate savings for retirement. Some recommend 12% to 15%, including the company's contribution.

Most businesses auto-enroll employees at 3% of pay. The most common fixed match is 50 cents per $1.00 up to the first 6% of pay.

First « 1 2 » Next