Are 401(k) Benefits Reducing Your Pay?
NEW YORK ( MainStreet) The more you save, the less you make. That could be a conclusion derived from research into 401(k) benefits and how they relate to employer compensation costs.
In an effort to boost employee participation in company-sponsored retirement plans, as encouraged by the Pension Protection Act of 2006, more employers have begun offering automatic enrollment features in 401(k) plans. When you're hired, you are signed up to automatically participate in the plan at a default contribution rate unless you opt out.
In an effort to determine the impact on total compensation by such retirement plan benefits, Barbara A. Butrica and Nadia S. Karamcheva analyzed company sponsored retirement plans in a study for the Center for Retirement Research at Boston College.
"Many workers eligible for 401(k) plans fail to participate, and those who do participate often save too little. Over the past decade, a number of employers have adopted auto-enrollment, and these policies have clearly boosted participation," Butrica and Karamcheva note in the report. "But the effect of auto-enrollment on workers' total 401(k) saving is unclear, because it depends partly on employer decisions about plan design and worker compensation. And these decisions could be affected by the increase in employers' 401(k) matching contributions generated by auto-enrollment."
In other words, if your employer is spending more on 401(k) benefits, they may be lowering worker pay and/or matching contributions in an effort to keep compensation costs level.
Using data from the National Compensation Survey conducted by the U.S. Bureau of Labor Statistics, the researchers wanted to determine if that was actually the case. It was.
The research showed that workers covered by auto-enrollment have a maximum match rate of 3.2% of pay, compared with 3.5% for those in plans without auto-enrollment. Butrica and Karamcheva say this difference is "statistically significant."
As to the possibility that employers reduce wages or other non-retirement compensation when paying more in 401(k) benefits, the researchers found evidence that was also true.
"These findings support the notion that employers with auto-enrollment may be aiming to keep their compensation costs roughly constant," Butrica and Karamcheva say. "While they end up spending more on workers who would not have participated without auto-enrollment, they spend less on workers who would have signed up anyway."
It seems diligent retirement savers may be getting lower matching contributions to support fellow workers who were enrolled automatically in the plan.
"Auto-enrollment policies are very successful at raising participation rates but may not boost workers' total retirement saving if firms aim to keep their 401(k) compensation costs at a constant level," the researchers conclude. "While auto-enrollment will increase saving for workers who would not have participated without it, those who would have participated on their own may end up saving less due to relatively low employer match rates and low default contribution rates."