Auto-enroll 401 (K)Setting anything to automatic has its good points and its bad ones. A 2006 law designed to increase retirement 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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Hello Regina,

So millions of 401k accounts have been created "involuntarily" AS OPPOSED TO "automatically" since 2006?

...and to create those accounts it requires what critical element? requires a "social security number", Regina

That would be considered "private information" that the employer would be releasing to the third-party administrator of the 401k plan....

...which would require what?

It would require the signed, written consent of the employee, correct?

millions of accounts created since 2006 and 0% compliance with professionals whose code of ethics would prohibit them from surreptitiously disseminating those numbers... Attorneys who cooked it up (bar association disciplinary arm)... pension plan administrators(disciplinary arm of the professional organizations who regulate their practice)... HR professionals(code of ethics).. payroll administrators (code of ethics)

0% compliance

In California it is illegal; in the other 49 states it is tortious.

Since the 401k Industry Association can't beat this on the merits they must try to win in tort court on technical grounds; to wit, remove one's "standing" before the court to file suit... do they accomplish that feat?

...they have the employee fill out a beneficiary form where he puts down his social security number thus constructively providing consent

0% out of millions is a scam, Regina

tskk...tskk... I know every objection, every demurrer; i can shoot them all down

This is a scam... and I was not manipulated into giving up my right to sue....

..but forget lawsuits,pffffftttt

When one has an entire industry and 3 or 4 professions with licenses/certificates the fun part is doing to them what the caged gorilla used to do to the American Tourister luggage suitcase in the 1970s TV Commercials...

... I have a third-party administrator ADP Retirement Services of Salem, NH and Florham Park, NJ & T Rowe Price of Baltimore, MD twisting in the wind unable to open their mouths even one tiny peep.

Regina... Edward Seidle has maintained that the Inspector General for the US Department of Labor issued 20 straight warnings for 20 straight years since 1989 that 70% of these 401k funds were never audited...

..they're underfunded and have taken on risky bets(private equity & hedge funds) because they can't get that 8% annual appreciation on their assets...


These people can NEVER ADMIT to what they have done

Regina... you should be warning people to stay away from these 401k funds mainly because the entire industry lied and everybody who should be the most trustworthy stewards of those funds are willing to participate in that lie....

...and poof!! goes the mantra which LBJ Advisor, Clark Clifford attributed to John Foster Dulles that if more than 2 people know anything about anything in Washington, DC that it will eventually leak

December 08 2011 at 4:39 PM Report abuse rate up rate down Reply

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July 11 2011 at 10:46 PM Report abuse rate up rate down Reply

How many US-based companies still offer a 401K option (or any similar plan) at all with any significant employer contribution? Traditional pensions are long-gone for everyone except public employees, replaced by the jointly funded employer-employee 401K. But with low-cost overseas labor and low-cost international shipping now available, a US-based employer has to cut every possible cost-corner just to stay in business. Small and medium-sized employers have largely done away with ANY retirement contributions. Some larger employers still offer a 401K with some employer contributions, but as the article points out, the employer's share is shrinking, and how many of us work for the few very large employers anyway? Not many percentagewise.

POSSIBLE BOTTOM LINE: We're headed towards an economy in which traditional pensions are gone, social security retirement benefits are virtually non-existent, and 401Ks have to be 100% self-funded by everyone including the hourly wage earner -- and try funding a meaningful 401K earning $17.50/hour (median hourly wage nationally) while paying rent/mortgage, medical insurance, car insurance, food and everything else. Cat food and cardboard boxes anyone?,

July 11 2011 at 10:21 PM Report abuse rate up rate down Reply

Any position can be justified. Undersatnding what, where and when can take time to learn.

July 11 2011 at 12:23 PM Report abuse rate up rate down Reply

Behavioral economics tries to explain why people do what they do. Unfortunately, there is no all-encompassing way to counter people's ignorance, reluctance, complacency, avoidance, etc. when it comes to things financial and mathematical.

Also, quoting context-free statistics makes no sense. Downside item #5 means nothing. OK, so numbers are down, but what does that have to do with auto opt-in? Isn't the economy down, too? Aren't people losing their jobs, so that median total household income has fallen? Wouldn't that cause people to reduce their 401k contributions? And if the economy were stable, wouldn't auto opt-in cause median take-home pay to fall, forcing people at the lower income scale to adjust their *total* 401k contributions so they have the same take-home pay?

July 11 2011 at 12:09 PM Report abuse rate up rate down Reply
1 reply to jmmydageek's comment

Is good point that the backdrop is a recession. Thanks for your input.

July 11 2011 at 4:01 PM Report abuse rate up rate down Reply

I have a feeling that most of the people who say they would have chosen a higher savings rate if they had enrolled themselves insteat of being auto enrolled would not have enrolled at all. If the auto enroll rate is too low, they can increase it at any time, and still have some retirement savings. If they did not enroll, at 3%, 5% or 20%, they would not have anything. Considering that they can change their savings rate at any time, auto enroll is 110% better than an opt-in program.

July 11 2011 at 9:21 AM Report abuse rate up rate down Reply