Autoenrollment’s Effect on TSP Underestimated

Autoenrollment is regarded by many as a tool that is of key importance in increasing retirement savings. A recent study by the Congressional Budget Office (CBO) emphasizes just how effective it can be. 

In “The Effect of Employer Matching and Defaults on Workers’ TSP Savings Behavior,” a presentation to the Association for Public Policy Analysis & Management by Justin Falk and Nadia Karamcheva of the Labor, Income Security, and Long-Term Analysis Division of the CBO, examine the effect of autoenrollment on employees enrolled in the Thrift Savings Plan (TSP), a retirement plan for federal employees. While the study concerns a plan for a public-sector employees, nonetheless the results could be useful to private-sector plan administrators and service providers as well. 

Employees hired before 1984 generally are part of the Civil Service Retirement System (CSRS), which provides a pension but no employer contributions to TSP. Those hired after that are in the Federal Employees Retirement System (FERS), which incorporates Social Security and provides a pension and matching contribution to the TSP of a 100% match on the first 3% that the employees contribute and a 50% match on the next 2%. Automatic enrollment was implemented for federal employees hired after August 2010, at a default contribution rate of 3%. 

The CBO found that estimates had substantially understated the effect of matching. It found that with the employer match: 

• The percentage of employees who contributed during the year before autoenrollment and the during the year after increased by almost 37 percentage points. 
• Participation increases by 22 percentage points. 
• The conditional contribution rate increases by 1.9 percentage points. 
• The average contribution rate increases by 3.5 percentage points. 
• The balance-to-pay ratio is twice as large 28 years later. 
• The share of bonds in workers’ portfolios increases by 7 percentage points. 

The CBO also found that matching reduces differences in participation and contribution rates between various groups. At the same time, however, because the allocation of investments in bonds is higher among those with lower earnings—those with low education and those in minority groups—even with matching, variations in the TSP balance accumulations between groups remain.