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The Dark Side of Automatically Enrolling Workers in 401(k)s


Rightfully lauded for boosting participation rates in 401(k) plans, the trend towards automatic enrollment in 401(k) plans is having the opposite effect on overall 401(k) savings rates. According to a recent article in The Wall Street Journal: “About 57% of large companies now automatically enroll new employees in 401(k) plans, up from 24% in 2006, according to Aon Hewitt. While employees are free to opt out, companies report average participation rates above 85%, compared with 67% for those without auto-enrollment, Aon Hewitt says.

Yet 401(k) participants’ average savings rates have fallen in recent years. Among plans Aon Hewitt administers, the average contribution rate declined to 7.3% in 2010, from 7.9% in 2006. The Vanguard Group Inc. says average contribution rates at its plans fell to 6.8% in 2010, from 7.3% in 2006. Over the same period, the average for Fidelity Investments’ defined contribution plans decreased to 8.2%, from 8.9%.

Both Vanguard and Hewitt estimate that at least half of the decline was due to the increased adoption of automatic enrollment.

The problem, the article adds, is that: “More than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise. That’s far below the 5% to 10% rates participants typically elect when left to their own devices.”

Some new data from Mercer, a human resources consulting firm that administers 401(k) plans, reveals just how wide the gap in savings rates can be between participants who are auto-enrolled and those who sign up on their own. When Mercer examined savings patterns among the 1.2 million participants in its plans as of year-end 2010, it found an average savings rate of 3.5% for those who were auto-enrolled, versus 8.5% for those who enlisted voluntarily.

Dave Tolve, U.S. Retirement Business Leader for Mercer’s Outsourcing business, says the message is clear: Companies need to do more to encourage employees to save at higher rates.

“The industry has looked upon these auto-features as a magic bullet,” says Mr. Tolve. “Yes, these programs will increase overall participation rates. But they also reduce average savings rates.”

According to Mercer, some 70% of participants who are automatically enrolled “never change their contribution rates.” In other words, they become stuck at a 3% savings rate—a “real cause for concern for [401(k) plan] sponsors who want to help participants save for a successful retirement,” says Mr. Tolve.

What can companies do to combat the trend? For one thing, they can implement auto-escalation features that increase employee savings rates by a set amount, typically one percentage point a year, until they reach a certain threshold.

According to Richard Thaler, a professor of economics and behavioral science at the University of Chicago’s Booth School of Business who, together with UCLA Anderson School of Management professor Shlomo Benartzi, is widely credited with the idea of automatic-increase, interest among employers in promoting the concept tapered off during the recession. In part, he says, that’s because when 401(k) contribution rates rise, so does corporate spending on matching contributions.

“My strong sense is that firms have not publicized the option to their employees, and made it easy to sign up,” Prof. Thaler says. “Now may be a good time to start getting firms to think about this again.”

Mr. Tolve says companies can also more aggressively use educational materials to coax low savers to boost their 401(k) deferrals.


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    • While the average deferral percentage is lower,the number of participants is higher and at least those who would not voluntarily enroll are now saving something. Those who voluntarily participate don’t appear to have lowered their deferral percentage. Overall good news!

    • I wonder if any outside economic factors, like the recession, may have been the cause of those who they expect to be paying in 5% staying at 3%.
      Also, if you look at the numbers – at 67% participation you had a 7.9% rate – at 85% participation you have a rate of 7.3%
      So what, a .6% rate decrease spread over a pool which is 18% larger? Did any of the higher contribution rate folks decrease the amounts they put in?

    • What a bs article. There is a dark side to automatic enrollment in 401k’s,but it isn’t what you state. The dark side is: That’s all there is to it, automatic enrollment. No ojt in actually usings the tools to move your savings around in response to market conditions; lame choices for the savings dollars, usually all with the same bank and their funds. Working stiffs like me whose wages have stagnated for the last 30 years while the price of all things we buy has increased more than 70%, leaving very little money to save, have you priced toilet paper lately? Visible manipulation of the stock market by the investment banks using supercomputers to make 3 trades a millesecond and inattention of the regulators to insider trades, creation of bogus investment products that are only paper which are shuffled between investment departments to pad profits. Automatic enrollment in 401ks is another method used by the investment banks, bought from the prostitutes in our congress to rob the working stiffs of the USA.

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    • 401(k) Auto Enrollment ‘Suppresses’ Saving? Really?

      It is discouraging to see an article, such as this one, and the recent front page Wall Street Journal (WSJ) article from a few weeks ago “401(k) Law Suppresses Saving for Retirement” – articles which are not only critical of 401k plans, but so badly misstate the value of automatic enrollment. These articles focus on some workers who say they would have contributed more under a 401(k) with voluntary enrollment – and they deliberately mislead by incorporating comparisons of average contribution rates among those who are enrolled in a recent period without adjusting for the difference in demographics.

      Consider a recent Vanguard study, “How America Saves, 2011,” Figure 23, page 25 — for those with < 1 years service, only 29% voluntarily enroll versus 75% with automatic enrollment. So, a year’s tradeoff can be estimated as:
      • 12% (40% of 29%) say they would have contributed more,
      • 17% (rest of 29%) would contribute 3% or less, but
      • 46% more (total 75%) enroll due to automatic features, and
      • All 75% are “teed up” for automatic escalation.

      Automatic features have been around for over 15 years. The authors of these articles focus on the group who say they intended to save more. Why didn’t you take the time to confirm that EACH and EVERY worker who allowed the automatic enrollment default to take effect was specifically notified of their opportunity to voluntarily enroll – and failed to take action? Why didn’t the article also focus on those who did enroll voluntarily, who rejected the default for a different rate, selected Roth 401(k) or changed investment allocations to something other than the Qualified Default Investment Alternative?

      But, OK, let's focus on those who say they woulda, coulda, shoulda saved more with a voluntary enrollment. Their failure to respond when solicited is not a surprise — it is sadly typical. Many studies confirm workers state an intention to start saving or to increase contributions but fail to follow through. My favorite is a 2002 Harvard study: for every 100 workers, 64 admitted they should be saving more and 24 said they would start saving more in 2 months, but only 3 were saving more four months later. Best intentions are just that — intentions.

      Finally, the use of average contribution rates among participants is misleading; citing a decline among AonHewitt administered plans from 7.9% (2006) to 7.3% (2009). However, the 2006 and 2009 populations are very different — by 2009, many joined at a 3% rate specifically due to the increased prevalence of automatic enrollment. In a May 2011 release, AonHewitt published a study of 120 large employer 401(k) plans it manages:
      • Participation increased to 75.8% in 2010 from 73.7% in 2009, and
      • Plans with automatic features increased to ~60% in 2010, from 24% in 2006.

      So, the article's failure to show the change in say, the average deferral percentage (ADP) was at best misleading — because when you include the non-participant zeros in your average, it creates a much more accurate measure of how automatic features change savings behavior.

      To conclude, yes, certainly the features in your automatic enrollment design do make a big, big difference. But, a plan sponsor using automatic features, done right (enroll all, escalate all, perennially), addresses the top 3 retirement preparation issues Americans face — most employers don't offer a plan, not enough employees save, and those who do save, often don't save enough.

      Why did you write such an article using data crafted to mislead?

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  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.