The Effect of Medium and Auto Enrollment Rates on Contribution Rates for Defined Contribution Plans

Indianapolis, IN

Twenty-one percent of workers covered by 401(k) retirement plans choose not to participate (Center for Retirement Research). Even when workers do participate the average contribution rate is between 5% and 7% (American Benefits Institute, 2013), while the ideal percentage according to Meir Statman is close to 15% (Clark, 2013). Auto-enrollment and the default employee contribution rate are plan features that are determined by the employer and can affect how much an employee saves for retirement (Butrica and Karamcheva, 2013). In addition, a company may choose to convey the plan information in a variety of ways such as in-person information sessions or on company websites. The manner in which information is communicated, either face-to-face or electronically, has been shown to affect individual actions (Aydin and Rice, 1999). This study seeks to address if the way in which information is communicated at the time of enrollment impacts an individual's chosen savings rate. Specifically, the study seeks to answer three questions. First, does the medium by which information about the retirement plan is presented to new workers make a significant difference in the percentage contributed to a defined contribution plan? Second, does the level of financial education impact an individual's contribution rate? Lastly, does the default rate set in an auto-enrollment plan impact the savings decision?