Longer term will lower estimates of its impact, but making saving easy remains critical.
The same research team that documented the impact of automatic enrollment and automatic upgrades in 401(k) plans returned to this topic to assess how real-life events affect the long-term effects of these automatic provisions. I think it would be really cool for researchers to go back and try out early results. My interpretation is that the authors still think these automatic rules are helpful—and rarely harmful—but the magnitude of the positive impact on savings is much smaller than they originally thought.
Some background. As 401(k) plans began to replace traditional defined benefit plans in the 1990s, critics pointed to the burden on potential participants. They must decide whether to join a plan, how much to contribute, how to invest those contributions, how to change asset allocations and contribution rates as they age, what to do with accumulation when they change jobs, and how to withdraw their retirement investments. That’s all. In response, academics and industry have tried to figure out how changing program design could make the process easier, thereby improving participation and balance.
Major innovations exploit inertia. It involves changing the enrollment mechanism from opt-in (employees must actively enroll in order to participate) to opt-out (employees are automatically enrolled in the plan at a specified contribution rate). In a 2001 study, a member of this “group” showed that when a major US company introduced automatic enrollment, contributions to the scheme increased from 37% to 86%. This impact is much larger than the impact of employer matching contributions. Moreover, later work found that it did not depend on the default payment rate, whether it was 3% or 6%. Notably, people tend to stick with default rates.
Much of the early work contributed to the provisions of the Pension Protection Act 2006, which encouraged automatic enrollment and automatic increases in preset contribution rates. (The legislation also authorized target-date funds.) SECURE 2.0 requires most new 401(k) plans to implement automatic enrollment and automatic upgrades.
While the impact of car provisions on participation is clear and robust, the impact on contributions is a bit trickier. Automatic enrollment would increase contribution rates for those who would never join the scheme and those who join at lower rates, but would reduce contribution rates for those who would otherwise contribute more than the default amount. On average, studies show that automatic enrollment increases donations. The discovery raises the question of where the additional donations come from. Did participants spend less or take on more debt? While a study of newly hired civilian workers in the federal Thrift Savings Program showed few negative credit effects, an analysis of mandatory automatic enrollment in the United Kingdom (with a much larger sample size) found that automatic enrollment had a positive impact on credit. The planned savings component (approximately 20%) was offset by an increase in unsecured debt.
All of this is the backdrop for a recently published paper by the gang, which looks at factors other than rising debt that could undermine the positive impact of automatic enrollment. For their sample, the first year of experience shows that automatic enrollment increases savings rates by 2.2 percentage points (see Figure 1). (For simplicity, this discussion focuses on automatic enrollment, but including automatic upgrades yields similar patterns.) However, after five years on the job, that percentage drops to 1.8 percentage points because many people no People who received automatic enrollment aggressively increased their contribution rates, closing some of the savings gap. In addition, employee turnover is high, with many leaving before employer matching contributions are fully paid, further reducing the incremental savings rate to 1.5 percentage points. Finally, because those who automatically enroll have relatively smaller balances, their withdrawal rates upon departure are higher than those who opt in, which further reduces the incremental savings rate to 0.6 percentage points.
So what will happen to us? Automatic enrollment significantly increases participation and has a positive net effect on savings. While focusing only on the first-year impact overstates the long-term incremental savings, focusing on real-world complexities overstates the negative impact on employee well-being. In fact, for employees moving from one job to another, thousands of dollars in support may be welcome. So making saving automatic and easy should still be the goal, even if imperfect.
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