Automatic 401k enrollment is suppressing retirement savings?

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Automatic 401k enrollment is suppressing retirement savings?

Postby NYCPete » Thu Jul 07, 2011 10:38 am

According to a new study by the Employee Benefit Research Institute, that may be the case...

A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people.

WSJ's Anne Tergesen reports a 2006 law allowing companies to automatically enroll people in 401(k) plans has had unintended consequences.

Under the law, companies are allowed to automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own. The measure was intended to encourage more people to bulk up their retirement nest eggs—a key goal in a country where millions of people aren't saving enough.

But an analysis done for The Wall Street Journal shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily, the Employee Benefit Research Institute found.


http://online.wsj.com/article/SB1000142 ... 22780.html

I have to say, I was a little surprised by this, and despite what the study says, I still can't shake the thought that someone who was auto enrolled and didn't raise their contribution rate probably wasn't going to enroll themselves on their own if they hadn't been auto enrolled.

Best,
Peter
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Re: Automatic 401k enrollment is suppressing retirement savi

Postby supersharpie » Thu Jul 07, 2011 10:44 am

NYCPete wrote:According to a new study by the Employee Benefit Research Institute, that may be the case...

A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people.

WSJ's Anne Tergesen reports a 2006 law allowing companies to automatically enroll people in 401(k) plans has had unintended consequences.

Under the law, companies are allowed to automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own. The measure was intended to encourage more people to bulk up their retirement nest eggs—a key goal in a country where millions of people aren't saving enough.

But an analysis done for The Wall Street Journal shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily, the Employee Benefit Research Institute found.


http://online.wsj.com/article/SB1000142 ... 22780.html

I have to say, I was a little surprised by this, and despite what the study says, I still can't shake the thought that someone who was auto enrolled and didn't raise their contribution rate probably wasn't going to enroll themselves on their own if they hadn't been auto enrolled.

Best,
Peter


A lot of people like for someone else to do the thinking for them in regards to their finances. My guess is that there are many naive people out there who assume that the company picked the right level of contribution to ensure a comfortable retirement (if that employee is thinking of retirement at all) and think that contributing any extra would be unnecessary.
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Postby allsop » Thu Jul 07, 2011 11:04 am

There has been studies by behavioral financial researcher showing that automatic enrollment (with option to opt-out at a later stage) in pension plans increases participation.

Other studies where the employee had the option to have a automatic larger 401(k) contributions based on future salary increases also showed higher savings than the control group.

I think that automatic enrollment is a good thing.
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Postby LRonHalfelven » Thu Jul 07, 2011 11:28 am

It'd be interesting to see whether they're observing this effect because auto-enrollment changes 401(k) participation in people's minds from something they do for their own benefit to an obligation the company imposes on them-- or whether perhaps it has the effect of stampeding them into a decision about their level of participation at a time when they're still facing expenses from relocation or unemployment, and have less of an idea about how long they're likely to be with the company. Either way, I'd bet the company would get better participation if they auto-enrolled only those people who haven't enrolled on their own after, say six months.
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Postby allsop » Thu Jul 07, 2011 11:38 am

It is not really that surprising a result (nowadays). Countries that have an opt-out to be an organ donor have more organ donors than those that have opt-in policies. I do not think that the opt-out countries have more altruistic citizens nor that pressure is applied.
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Postby KyleAAA » Thu Jul 07, 2011 11:43 am

Well most auto-enrollments are set so low. Why don't they make the minimum auto-enroll amount 10% and go from there?
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Postby allsop » Thu Jul 07, 2011 11:55 am

One of the articles I read (have to find them again) addressed the level of contribution. One approach was to automatically increase future contributions as a percentage of future salary increases, and that gave good results.

Many cannot commit themselves to an immediate high contribution but future increases seemed to do the trick. Better than the alternative of giving up saving at all that otherwise very well would happen.

In a similar note: In Sweden there are many that only pay the interest on their mortage. They say that since they have such a big mortage it does not matter if they do not pay down on the principal.
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Postby NYCPete » Thu Jul 07, 2011 12:22 pm

Upon closer inspection, I think the conclusion of the study, or perhaps the way the article is interpreting the study, is flawed.

The article is complaining that average 401k savings rates have gone down. Well of course the average savings rate will go down because of auto enrollment!! :roll:

For example: you have 10 people in a company, 7 of them contribute 8% to their 401k, and the other 3 contribute zero. The average contribution rate is 5.6%. The company hires 5 new people and auto enrolls them at 3%. Now there are 15 people in the company but the average contribution has decreased to 4.73% (assuming the 3 others still contribute zero). Is there more money now going into the 401k? Of course there is! Is there more money going into the 401k than if there had been no auto enrollment? Inconclusive, since that is affected by pay, and whether a few of those 5 new hires would have elected on their own a higher than 3% savings rate. To which I would respond, "if one of those 5 new hires would have elected a higher rate than auto enrollment, then what is stopping him/her from doing so once they've started?" Auto enrollment is a nudge to start, not a deterrent from future action for those who would have done so otherwise.

The article also says that total annual amount being put into 401ks is 13% higher since 2006. Given that the last 5 years have been wretched for the markets, and that consequently, less people might be inclined to put money in their 401k, doesn't the 13% increase give at least some credence to auto enrollment being a cause for the growth in total annual contributions?

Since it doesn't include the total annual amounts contributed for comparison, the graphical image the article uses really seems to me to be purposefully skewing the issue...

Best,
Peter
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Postby campy2010 » Thu Jul 07, 2011 12:38 pm

KyleAAA wrote:Well most auto-enrollments are set so low. Why don't they make the minimum auto-enroll amount 10% and go from there?


In the article, companies said the barrier to them enrolling people at a higher level is that they did not want to pay for matching contributions.
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Postby NYCPete » Thu Jul 07, 2011 12:44 pm

campy2010 wrote:
KyleAAA wrote:Well most auto-enrollments are set so low. Why don't they make the minimum auto-enroll amount 10% and go from there?


In the article, companies said the barrier to them enrolling people at a higher level is that they did not want to pay for matching contributions.


This is an interesting point, because from what I understand, matching funds were originally intended as an incentive to get people to enroll in the 401k program and participate in it, because if a company didn't have people at all pay levels participating, then it wouldn't pass Safe Harbor rules, and top executives wouldn't get to use the 401k fully. One of the arguments I saw against auto enrollment in 2006 was that it would give the companies cover to reduce their matching contributions, because more people would be participating and the safe harbor rules would be easier to pass.

Best,
Peter

P.S. I'm not an expert on Safe Harbor provisions.
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Postby tms » Thu Jul 07, 2011 2:05 pm

NYCPete wrote: Auto enrollment is a nudge to start, not a deterrent from future action for those who would have done so otherwise.

Best,
Peter


Good point, I am skeptical as well. But I think what it is saying is that for people who were going to sign up anyway, that the lower rate is a deterrent. The article discusses inertia, but there may also be some mental anchoring going on - the auto rate is used as a mental reference point, and decisions are biased toward that rate.
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Postby allsop » Thu Jul 07, 2011 2:41 pm

tms wrote:
NYCPete wrote: Auto enrollment is a nudge to start, not a deterrent from future action for those who would have done so otherwise.

Best,
Peter


Good point, I am skeptical as well. But I think what it is saying is that for people who were going to sign up anyway, that the lower rate is a deterrent. The article discusses inertia, but there may also be some mental anchoring going on - the auto rate is used as a mental reference point, and decisions are biased toward that rate.


There is much behavioral finance peer-reviewed research that supports auto-enrollment in 401(k) plans as well as having the employee committing future percentage of salary increases. What is not to like?

There are so-called "tenets" of how to be a Boglehead and most of it is actually based on research and experience, and the above is exactly in line.
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Postby etherscreen78 » Thu Jul 07, 2011 2:53 pm

speculative and proves nothing.
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Postby allsop » Thu Jul 07, 2011 2:56 pm

etherscreen78 wrote:speculative and proves nothing.


Who do you address?
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Postby MarcVH » Thu Jul 07, 2011 7:33 pm

I was disappointed to the that this study doesn't seem to cover the most important issue IMHO: what happens to these auto-enrolled people when they leave the job? Historically roughly half of plan participants cash out (paying taxes and penalties) at this time. Are people who are auto-enrolled doing this too? Are they doing it at higher rates?
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Postby rob » Thu Jul 07, 2011 7:43 pm

NYCPete wrote:Upon closer inspection, I think the conclusion of the study, or perhaps the way the article is interpreting the study, is flawed.

lol - Well there could be that.... but lets not let facts get in the way ok :-)
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Re: Automatic 401k enrollment is suppressing retirement savi

Postby mickeyd » Thu Jul 07, 2011 7:53 pm

NYCPete wrote:According to a new study by the Employee Benefit Research Institute, that may be the case...

A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people.

WSJ's Anne Tergesen reports a 2006 law allowing companies to automatically enroll people in 401(k) plans has had unintended consequences.

Under the law, companies are allowed to automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own. The measure was intended to encourage more people to bulk up their retirement nest eggs—a key goal in a country where millions of people aren't saving enough.

But an analysis done for The Wall Street Journal shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily, the Employee Benefit Research Institute found.


http://online.wsj.com/article/SB1000142 ... 22780.html

I have to say, I was a little surprised by this, and despite what the study says, I still can't shake the thought that someone who was auto enrolled and didn't raise their contribution rate probably wasn't going to enroll themselves on their own if they hadn't been auto enrolled.

Best,
Peter


Surprising indeed. I think it may be that new participants are afraid to increase their contrabution rate to the Plan and are also ignorant of basic investing ideas. Thus, they leave it all in something "safe" like MMF and never bump it up from 3% to 5%.
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Postby tfb » Fri Jul 08, 2011 1:34 am

LRonHalfelven wrote:I'd bet the company would get better participation if they auto-enrolled only those people who haven't enrolled on their own after, say six months.

I agree. If there isn't auto-enrollment, you have the paperwork from new hire orientation and you know it's a task. If somebody else does it for you automatically, you consider it done and cross it off your to-do list. So without auto-enrollment, some will choose a higher percentage and some will never join. With auto-enrollment, more people join but they stay at the low rate. Catching those who don't enroll themselves after some time is a great idea.
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Postby Bob's not my name » Fri Jul 08, 2011 5:05 am

Or maybe Nudge is a crock and we should stop piling nudges on top of nudges and focus on reducing the number of laws controlling retirement savings so people can actually understand what their options are.

http://thefinancebuff.com/want-to-encou ... y-tax.html

http://www.bloomberg.com/apps/news?pid= ... nCwBTd6tK0
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Postby ftobin » Fri Jul 08, 2011 9:47 am

tfb wrote: With auto-enrollment, more people join but they stay at the low rate. Catching those who don't enroll themselves after some time is a great idea.

I'm not sure if other companies are the same, but my employer (large financial institution) automatically increases one's contribution one percentage point each year if you are in are in the default settings. I forget the top-out level, but I'd throw in a guess of 10-15%.
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Postby tms » Fri Jul 08, 2011 10:40 am

Bob's not my name wrote:Or maybe Nudge is a crock and we should stop piling nudges on top of nudges and focus on reducing the number of laws controlling retirement savings so people can actually understand what their options are.

http://thefinancebuff.com/want-to-encou ... y-tax.html

http://www.bloomberg.com/apps/news?pid= ... nCwBTd6tK0


Amen.
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Postby NYCPete » Tue Jul 12, 2011 12:49 pm

As an update to my original post, the EBRI, who commissioned the study that the WSJ cites, issued a press release on the coverage of their study.

The WSJ article reported only the most pessimistic set of assumptions from the EBRI research and did not cite any of the other 15 combinations of assumptions in the study, notes EBRI Research Director Jack VanDerhei. The WSJ also chose not to report any of the positive impacts of auto-enrollment 401k-type plans in the simulations that were done by EBRI.

“The headline of the article reports that auto-enrollment is reducing savings for some people. What it failed to mention is that it’s increasing savings for many more – especially the lowest income 401k participants,” VanDerhei said.


Full press release text here: http://www.ebri.org/pdf/PR931.07July11.WSJ-Rsp.pdf

Full response to article here: What Do You Call a Glass That Is 60%- 85% full?

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Peter
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