In recent years, automatic enrollment has been advocated as a way to  encourage greater participation in 401(k) plans among the portion of the  workforce who have access to such plans but opt not to participate. Employers  may also adopt an automatic escalation policy, under which an employee’s  contribution rates would be automatically increased at periodic intervals,  such as annually. Other proposals have been put forth with the intent of broadening the  practice of saving for retirement among workers whose employers do not  sponsor a retirement plan. Automatic Enrollment Raises Plan Participation, but Some Plan Sponsors Have Not Adopted Plan Features That Could Further Facilitate Retirement Savings

Existing studies show that automatic enrollment significantly increases  participation rates in 401(k) plans, although beneficial effects of automatic  enrollment may depend on accompanying policies designed to ensure  adequate savings and appropriate investment. While defined contribution  plan sponsors have increasingly adopted automatic enrollment in recent  years, this approach may not be suitable for all plan sponsors, and  available data show that some plan sponsors have not augmented  automatic enrollment policies with other policies designed to ensure  adequate savings. The high level of participation rates under automatic enrollment appears  to persist after such policies are adopted, according to two of the studies  in our review. Further, the widespread adoption of target-date funds  (TDF)—funds that allocate investments among various asset classes and  automatically shift to lower-risk, income-producing investments as a  “target” retirement date approaches—as default investments for plans with  automatic enrollment has raised concerns about investment risk and  transparency of investments of TDFs for participants nearing retirement. Data from Fidelity  Investments show that the percentage of defined contribution plans  adopting automatic enrollment grew from about 1 percent in December  2004 to about 16 percent in March of 2009. Automatic IRA and State-Assisted Retirement Savings Plan Proposals Could Improve Access to Retirement Savings Vehicles for Uncovered Workers, but Each Proposal Faces Challenges

In order to promote retirement savings among the 40 percent of the  workforce whose employer does not sponsor a plan, members of  Congress, in recent years, have introduced bills for federally required  “automatic IRAs” that would be implemented nationwide. Automatic IRAs  offer the potential benefit of expanding retirement coverage but some  have expressed concerns that automatic IRAs may not result in significant  retirement savings, and raised questions about the costs of such a program  for employers and the federal government. However,  some experts agree that the automatic enrollment component of  automatic IRAs has the potential to significantly increase the number of  workers saving for retirement by including workers that currently do not  have access to an employer-sponsored plan. Program Participation: Little is known about the extent to which  employers and employees would participate in a state-assisted retirement  savings program. Automatic IRAs may hold promise for workers who do not have access to  an employer-sponsored plan. Appendix I: Scope and Methodology

To determine what is known about the effect of automatic enrollment  policies among the nation’s defined contribution plans, as well as the  extent of and prospects for such policies, we first reviewed reports  examining the impact of automatic enrollment, default contribution rates,  and default investment funds on participation rates and saving patterns. To determine the potential benefits and limitations of automatic IRA  proposals and state-assisted retirement savings plan proposals, we  analyzed the Automatic IRA Acts of 2006 and 2007 as well as state-assisted  retirement savings proposals from four states. We also reviewed relevant federal laws and regulations.
Why GAO Did This Study

Although employer-sponsored retirement plans can be an important component of income security after retirement, only about half of all workers participate in such plans. To foster greater participation among workers who have access to such plans, Congress included provisions that facilitate plan sponsors' adoption of automatic enrollment policies in the Pension Protection Act of 2006. To foster greater retirement savings among workers who do not have access to an employer-sponsored plan, proposals have been made at the federal level for an "automatic IRA" and at the state level for state-based programs. Because of questions about the extent of retirement savings and prospects for a sound retirement for all Americans, GAO was asked to determine (1) what is known about the effect of automatic enrollment policies among the nation's 401(k) plans, and the extent of and future prospect for such policies; and (2) the potential benefits and limitations of automatic IRA proposals and state-assisted retirement savings proposals. To answer these questions, GAO reviewed available reports and data, and interviewed plan sponsors, industry groups, investment professionals, and relevant federal agencies.

What GAO Found

Automatic enrollment appears to significantly increase participation in 401(k) plans according to existing studies, but may not be suitable for all plan sponsors. Some studies found that participation rates can reach as high as 95 percent under automatic enrollment. Available data indicate that the percentage of plans with automatic enrollment policies increased from about 1 percent in 2004 to more than 16 percent in 2009, with higher rates of adoption among larger plan sponsors. In most cases, these plans automatically enroll only new employees, rather than all employees. We also found that automatic enrollment may not be suitable for all plan sponsors, such as those with a high-turnover workforce. Further, some data show that while automatic escalation policies--which automatically increase saving rates over time--are increasingly common, they lag behind adoption of automatic enrollment. In combination with low initial contribution rates, this could depress savings for some workers. Also, the emergence of target-date funds--funds that allocate investments among various asset classes and shift to lower-risk investments as a "target" retirement date approaches--as the typical default investment raises questions in light of the substantial losses such funds experienced in the past year. Other proposals could expand the portion of the workforce saving for retirement, but these proposals could face challenges. Under a federally mandated automatic IRA, certain employers could be required to enroll eligible employees in payroll-deduction IRAs, unless the worker specifically opted out. Such a proposal could broaden the population that saves for retirement at minimal cost to employers. However, this proposal faces a number of challenges, including uncertainty about the extent to which it would help low-income workers accumulate significant retirement savings. Proposals for state-assisted retirement savings programs could raise coverage and, ultimately, savings by involving state governments in facilitating retirement savings for workers without access to an employer-sponsored plan. However, such programs face uncertainty about employer and worker participation levels, as well as legal and regulatory issues.