Data and Methodology
Source data for the Automatic 401(k) Impact Calculator was obtained by Brightscope from reports published by Fidelity and Vanguard, which together encompass roughly 25 percent of corporate defined contribution plan participants:
- Fidelity’s Building Futures (2007) is based on recordkeeping data for 12,770 defined contribution plans covering over ten million participants.
- Vanguard’s How America Saves (2011) is based on recordkeeping data for 1,700 defined contribution plans covering over three million participants.
To calculate the impact of automatic enrollment on participation and deferral rates, Fidelity and Vanguard compare the participation and deferral rates of their voluntary enrollment plans to the participation and deferral rates of their automatic enrollment plans. The methodologies employed by the two providers are similar and allow for their aggregation into a combined dataset.
In the studies, the data is either broken out by employee income (Vanguard) or compensation (Fidelity)—for example, $30,000 to $49,999. In general, the studies find that as employee income rises, participation and deferral rates increase—and this information is built into the calculator. For instance, the Automatic 401(k) Calculator allows the user to select an average income level and then shows the impact that the adoption of automatic enrollment might be expected to have on plans with similar average incomes—in terms of participation rate and deferral rate. In addition, the calculator interpolates between the data points for different income ranges to arrive at a smooth curve measuring the impact of automatic enrollment. This approach assumes that the underlying data is in fact smooth, which may or may not be the case.
Deferral Rate Methodology
The Automatic 401(k) Impact Calculator assumes eligible employees not contributing to the plan have a zero percent deferral rate and includes them when calculating the average deferral rate. Some employers use a different methodology for computing the deferral rate—based only on employees who participate in their plan, but excluding eligible employees who do not participate. Employers using this second method may see its deferral rate fall when automatic enrollment is implemented. This is because there would be an influx of new participants at the default savings rate, say three percent, which may be below the plan’s average of current participants. Thus, the average deferral rate would decline.
Participation Rate: The percentage of eligible employees who make voluntary contributions to their employer’s retirement plan.
Deferral Rate: The percentage of income employees contribute to their employer’s retirement plan (excluding eligible employees not contributing to their plans).