Automatic enrollment has been a resounding success. Several studies have shown that it has dramatically increased 401(k) participation, especially among those that are least likely to participate in retirement plans. Auto enrolled plans boast participation rates that are a full 10% higher than plans that do not auto enroll.
But is the news all good? We don’t think so. We believe that the practice of automatically escalating the retirement plan contributions of the company’s workforce may be more important than simply automatically enrolling them. A study by the Center for Retirement Research concluded that “among those included in a plan, workers who were automatically enrolled when they became eligible are less likely to contribute to their DC plan than those who voluntarily enrolled”. In other words, people are susceptible to a mentality of “set-it-and-forget-it” when they are automatically enrolled. The danger here is that many employers do not want to be too paternalistic or intrusive into their employees’ lives so they aim too low when setting the initial contribution amount for the plan. The truth is that once people get into the set-it-and-forget-it mindset, they “check off” that box in their mind believing that their retirement saving has been handled. In reality most employers set their initial contribution rates well below the level that would ensure a meaningful retirement. In fact, most set it at a level that is even less than fully takes advantage of the employer match.
While many employers make this decision thinking their employees will push back if they start to auto enroll at a higher or more meaningful level, research has shown that most will not push back until the contribution rate reaches the threshold of 9 – 10% of pay. This leaves significant room above the 1 – 3% initial enrollment rate of most auto-enrolled plans and given that most should be saving between 10 and 20% of their current income to achieve an equivalent lifestyle in retirement as that to which they are now accustomed to living.
So, while we are big fans of how automatic enrollment has given a huge boost to the total numbers of workers enrolled in retirement plans, we believe that the auto enrollment decision should not be made in a vacuum. In addition to automatically enrolling employees, automatically escalating their contribution rate until it reaches a level that gives them a chance to retire with dignity is just as important as the first decision of implementing an auto-enrolled plan.
Please note that these opinions are our own and do not necessarily reflect those of LPL Financial or Global Retirement Partners.