A new study through Vanguard, an investment firm, found that Americans of all ages increased their participation in workplace retirement plans over the past twenty years. Notably, in 2021, 62% of Gen Z workers were actively saving by utilizing a 401(k), in comparison to 30% in 2006. While Gen Z, employees aged 18 through 24, experienced the most dramatic increase, all generations increased in retirement plan enrollments. This increased participation can likely be attributed to the introduction of automatic enrollment.
In 2006, the Pension Protection Act was passed by Congress, giving employers the authority to default employees into their offered retirement plans. Around that time, only 11% of employers utilized an auto-enrollment feature. In 2021, the number increased to around 50% of employers.
Today, more employees are being defaulted into participating with the option to opt out if desired, and the data has shown very few people are opting out. According to the U.S. Bureau of Labor Statistics in 2021, only around 75% of private industry workers with access to an employer-provided plan manually enrolled. By switching to default enrollment, new hire 401(k) enrollments significantly increased to around 90%.
Experts on behavioral finance understand there is a direct correlation between increased 401(k) enrollment through automatic enrollment and status quo mentality. People are less likely to make decisions to change their environment, especially regarding seemingly complex concepts like investing. Therefore, employers are finding that people are more likely to invest in their retirement if no action is required.