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Automatic Enrollment of 401 (k) Plan

Essay by   •  January 22, 2017  •  Essay  •  511 Words (3 Pages)  •  775 Views

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The paper mainly talks about that under automatic enrollment of 401 (k) plan, the participation rate increases a lot. It also mentions that a large proportion of 401(k) participants keep the default contribution rate and fund allocation after automatic enrollment are implemented. The paper focus on people who are from large U.S. corporation before and after the change of 401(k) and after automatic enrollment are announced, employees are enrolled immediately upon hire unless they choose to opt out the 401(k). These topics are worth studying because we can see how the employees choose their contribution rate and investment allocation when company has chosen a default setup. Do employees study this plan and choose their own particular outcome or just inertia wins?

In the paper, the author finds that the most important determinant of 401(k) participation is tenure in the absent of automatic enrollment. This evidence is convincing because job tenure determines the vesting of employer contributions and may affect employees' knowledge about the plan. Employees have more time to become more financially literate and to evaluate what kinds of options they have. So the 401(k) participation would be higher with tenure prior to automatic enrollment.

The author separates the participants into three groups: Old, Window and New. Old group is the people who are hired from April.1 1996 to March 31, 1997. Window groups are people who are hired from April.1 1997 to March 31, 1998. New group are people who are hired from April.1 1998 to March 31, 1999.  The automatic enrollment was implemented after April. 1 1998. Through these three groups, we can see how automatic enrollment change their saving behavior. There are some interesting findings. New group, who are hired under automatic enrollment, do not move away from the default contribution rate or fund allocation. Most of them would choose 3% contribution rate and 100% in the money market fund. However, Old and Window groups have more diversified investment allocation such as stock market or mutual funds. Few people from these two groups would choose default contribution rate. The possible explanations are participant inertia, cost of transaction and status quo bias.

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