Fidelity Investments recently found that, despite growth in the number of employers adopting automatic 401(k) features, overall uptake is slower than anticipated due to cost and other factors.

In its annual report on the 401(k) industry, analyzing 13,000 defined contribution retirement plans, Fidelity noted that 301 plans utilized automatic enrollment last year, up from 153 plans in 2005.

The number of employers using automatic increase programs climbed from 6,136 in 2005 to 7,316 in 2006, which represents a 19% jump.

Most companies use automatic enrollment only with their new employees, observes James Cornell, the senior vice president of employer marketing at Fidelity Employer Services Company.

About 29% of companies now auto-enroll all of their eligible workers.

Still, some employers shy away from adopting automatic features because of the uncertainty over costs and doubt about whether participants can afford retirement savings, given their personal expenses.

However, "education for plan sponsors is going to drive that change," says Jeffrey R. Carney, president of retirement services at Fidelity Employer Services Company.

"As they see their peers take action, they will have more confidence. I think that will break the inertia."

Cynthia Hayes, a managing director at Merrill Lynch's retirement group, says some employers have not adopted automatic features because they are waiting for final guidance from the federal government regarding default investment elections and qualified dividend income.

Employers are also concerned about the challenges of communicating automatic features to their employee base, she notes.

The bulk of plan sponsors that are most worried about cost are businesses in the retail industry, where first-year turnover is high, Hayes explains.

"We advise those plan sponsors to use auto-enrollment to get employees to save, but simply start to match after a year.

"That way the employer is not spending its money until the worker has made a one-year commitment to the company," she remarks.

Jack VanDerhei, a research fellow at the Employee Benefit Research Institute, concurs that cost may play a role in keeping some employers from implementing auto-enrollment.

For example, an employer that has a 50% participation rate in its 401(k) now might have a 90% participation rate with auto-enrollment.

"Unless you change your matching rates, you probably are going to have to double what you are putting in the plan," he says.

Overall, Hayes is optimistic about the market penetration of auto-solutions in retirement plans.

"We are seeing increased momentum this year and expect another 50 or so employers to join our ranks of the 109 clients who already use auto -solutions by the end of the year."

Workplace savings under DC plans

Employers that offer auto-enrollment and auto-increases saw their participants' savings rise for all age groups, Fidelity notes.

Nevertheless, the average employee participation rate fell slightly from 63.4% in 2005 to 63.1% in 2006.

In addition, the percentage of income employees contributed to defined contribution retirement plans remained unchanged at 7%.

Unfortunately, 75% of workers had investment allocations that were not properly diversified for their age. Fidelity reports:

• 22% held all equities.
• 13% helding no equities.
• 19% had their savings in a single nondiversified investment option.

Meanwhile, the average 401(k) account balance increased 6.5% from $62,500 in 2005 to $66,500 in 2006.

In terms of average account balances, participants across all age groups have increased the size of their nest eggs:

• Baby boomers stood at $89,000, up 11% from $80,000 in 2005.
• Gen Xers had an average of $34,000, up 17% from $29,000 in 2005.
• Gen Yers had $6,000, up 23% from $5,000 in 2005.

The results here are "a call to action for employers to look at their benefit programs more strategically and make sure they are addressing the unique needs" of their subset of employees, says Cornell.

"As employers are thinking about their 2008 business planning, we would like [401(k) auto-solutions] to be apart of that equation."

In addition, the average 401(k) account balance among U.S. workers who consistently held 401(k) accounts from 1999 through 2006 increased at an annual rate of 8.7%, according to recent research from EBRI and the Investment Company Institute.

The median account balance rose at an annual rate of 15.1%, researchers note.

The EBRI/ICI research reveals that the average 401(k) account balance increased to $121,202 at year-end 2006 from $67,760 at year-end 1999 for thosewho held the accounts for the entire period.

"The average 401(k) participant had a good year in 2006 because the majority of 401(k) assets are invested in equities, and the stock market did very well last year," says VanDerhei, who co-authored the report.

"But year-to-end comparisons can vary sharply, which is why it's far more meaningful to look at how participants' accounts have performed over time," he comments.While the research doesn't specifically examine the impact of DB plan freezes on 401(k) savings, VanDerhei says that employers that have frozen or closed their DB plans are more likely to either set up new defined contribution plans or increase the employer contributions to those plans.