The Pension Protection Act of 2006 has had an overwhelming positive impact on both 401(k) plan design and participant savings behavior, according to an analysis of Fidelity Investments clients.
Of the nearly 11.7 million 401(k) participants in more than 20,000 plans that are Fidelity clients, 51% of participants as of Sept. 30 were in plans that offer auto enrollment, up from 16% five years ago. The percentage of plans defaulting participants into age-based lifecycle funds has increased to 73% from 11% in 2006.
Among the largest 401(k) plans — those with more than 50,000 participants — 63% offer auto enrollment; among all plans serviced by Fidelity, 21% have auto enrollment, up from 2% in 2006.
The participation rate for eligible employees with auto-enrollment plans is significantly higher than those without, at 82% compared to 55% for employees without the option. The contrast is even greater for employees age 20 to 24, where the participation rate is 76% for plans with auto enrollment and only 20% in those plans without it.
The PPA offers a safe harbor from discrimination testing for companies that automatically enroll employees in their 401(k) plan and meet certain other requirements, such as the use of a qualified default investment option.
“The great news is that the legislation really has made a difference, and plan sponsors are embracing it,” said Jeanne Thompson, vice president of retirement insights in a telephone interview. “It’s really done a great job for younger employees and lower-income workers that do not normally participate.”
During the 12 months ended Sept. 30, 84% of active participants made employee contributions, the highest level in more than two years, Ms. Thompson said.