The Pros and Cons of Automatic 401(k) Enrollment

Auto-enroll 401 (K)
Auto-enroll 401 (K)

Setting anything to automatic has its good points and its bad ones. A 2006 law designed to increaseretirement savings allowed companies to auto-enroll employees in 401(k) plans. The Wall Street Journal concludes the law undercuts retirement savings. In contrast,Time magazine suggests, on balance, the law and resulting changes did more good than harm. The debate continues. In the meantime, here's a practical list of five pros and five cons of 401(k) auto-enrollment:

The Upsides of Auto-Enrollment

  1. More takers: Approximately 57% of sizable companies now use auto-enroll and report participation rates above 85%. (Source; Aon Hewitt)

  2. Net savings gain: Changes have promoted and increased overall retirement savings. (Source: ICI)

  3. Automatic escalation: Some plans allow you to automatically increase the contribution amount each year.

  4. Catch-up contributions: If you are 50 or older, you may eligible to contribute additional pre-tax savings. Calculate here.

  5. Something is better than nothing: Millions of people might not have saved a cent if they had had to proactively opt in.

The Downsides of Auto-Enrollment

  1. Low balling: An analysis done for the WSJ reportedly indicates an estimated 40% of new workers would have picked a savings rate higher than they were assigned. If you've been automatically putting away less than you would have consciously decided, it can be hard to make up the difference.

  2. Opting out: On the flip side, if the assigned rate is too high, the propensity to opt out may altogether increases.

  3. Cost-cutting: Lower default rates may be a function of company cost-cutting for companies that match contributions. While the employers save, the employees save less.

  4. Complacency: Auto-enrollment prompts some people to think things are "all taken care of," but is not the same thing as having a comprehensive retirement plan and goals as explained in this US News Case Against 401(k) Auto Enrollment.

  5. Less is worse than more: Multiple 401(k) plan administrators -- Aon Hewitt (AON), Vanguard Group (VTI), Fidelity Investments, etc. -- report average contribution rates have declined since the introduction of auto-enroll.

In reflecting on years of human resources experience, longtime HR executive, Dave Harmon, explains, "Inertia and education are two very big factors with auto enrollment." He is a huge proponent, but thinks related programs need to include ongoing education for millennials and under-forty employees, adding "Companies have a responsibility to assist with education and they should step up and increase matched amounts, as the days of defined pension plans are over."

From an employee perspective, Laura Lee Wren from Pocono Lake, Pa., summed up our 401 (k) mixed emotions well. "I occasionally regret signing up for the maximum allowed -- roughly every payday -- but am hoping someday I'll look back and say it was worth it."

CORRECTION: erroneously attributed data to The Employee Benefit Research Institute in the initial version of this story. The references have since been pulled and their latest comments on the auto-enrollment topic are available here.

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