The Pros and Cons of Automatic 401(k) Enrollment
The Upsides of Auto-Enrollment
- More takers: Approximately 57% of sizable companies now use auto-enroll and report participation rates above 85%. (Source; Aon Hewitt)
- Net savings gain: Changes have promoted and increased overall retirement savings. (Source: ICI)
- Automatic escalation: Some plans allow you to automatically increase the contribution amount each year.
- Catch-up contributions: If you are 50 or older, you may eligible to contribute additional pre-tax savings. Calculate here.
- Something is better than nothing: Millions of people might not have saved a cent if they had had to proactively opt in.
- 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.
- Opting out: On the flip side, if the assigned rate is too high, the propensity to opt out may altogether increases.
- 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.
- 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.
- 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.
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: DailyFinance.com 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.