Two Views on Auto Enrollment

Posted on July 14, 2010


The auto-enroll feature of the 401(k) is often touted as a key part of an overall strategy to increase workers’ retirement savings. But is automatic enrollment all it’s cracked up to be? Two recent blog posts take opposing sides on the question of the feature’s ultimate value.

In one corner is David John from the conservative Heritage Foundation. In a blog post entitled “Automatic Enrollment Builds Retirement Savings – Period,” he writes:

Adding automatic enrollment to a 401(k) retirement savings plan builds retirement savings. It especially helps lower and moderate income workers, but employees at all income levels start to save earlier, save more, and have better investment choices than similar plans without that mechanism. This simple fact is true despite some press reports and blog entries suggesting that automatic enrollment may “hurt” retirement savings.

John goes on in his post to take issue with research claiming that as more employers adopt the auto-enroll feature, many of those employers also reduce their matching contributions. The paper, written by the IMF’s Mauricio Soto and the Urban Institute’s Barbara Butrica, is discussed in a blog post by Howard Gleckman. According to Gleckman,

Mauricio and Barbara found that employer match rates are about 7 percentage points lower for opt-out plans. They can’t say for sure whether auto enrollment causes lower match rates. But it sure is possible. After all, if more employees participate, their employers will have to spend more to match their contributions. Whatever the cause, it seems that while auto-enrollment may increase the number of workers with 401(k)s, it won’t necessarily boost their retirement savings.

So who is right?

Based on the research done to date, it’s tough to know for sure. The Soto/Butrica study does seem to have some flaws, but the bottom line is that the jury is still out on whether auto-enrollment will have a major positive impact on workers’ future retirement security. One thing that is quite clear, however, is that with the continuing shift from defined benefit to defined contribution plans, workers certainly have much greater responsibility – we are all pension fund managers now. As many have pointed out, the original idea behind the 401(k) was that the plans would supplement traditional pensions, not replace them. Encouraging workers to contribute – whether through automatic enrollment or through other means – is only one part of the puzzle. The other equally important part is helping workers to make good investment decisions, which is much more difficult.