Automatic Enrollment Hurts Retirement Saving

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This title of this article certainly is sensational, but it’s not supported by the article.
Let’s assume that a) automatic enrollment increases participation and b) the average deferral is lower with automatic enrollment. This does not necessarily mean that automatic enrollment reduces savings rates. The lower average deferral may be statistically true, but it may come about because automatic enrollment skews the final result by adding in new people at a low rate.
For example:
A company has 4 employees and 2 of them participate in the 401k plan (a 50% enrollment rate).
One employee contributes 8% of salary and one contributes 10% of salary.
The average deferral is 9% (8% + 10% = 18%. Divide by 2 to get 9%) .
The company institutes automatic enrollment at 3%. One of the remaining two employees opts out altogether, but the other does not. Now the company has a 75% participation rate, but, since the new participant is contributing at 3%, the average deferral rate falls to 7% (8% + 10% + 3% = 21%. Divide by 3 to get an average of 7%).

Thomas Finch of CA 5:49PM August 10, 2011

Your headline is misleading.
The top 3 retirement preparation issues Americans face are:
o Most companies firms do not offer a retirement savings plan,
o Too many who are eligible fail to save, and
o Those who do save, often do not save enough.
Most 401k plans don't have automatic enrollment. Most plans that do often limit automatic features to new hires, and only a subset of those plans use automatic escalation. However, the data you cited only tell part of the story about automatic features.
Consider a recent Vanguard study, "How America Saves, 2011," Figure 23, page 25 — of those with < 1 year service, only 29% voluntarily enroll vs 75% with automatic enrollment. Recent EBRI analysis, in one scenario, suggest perhaps as many as 40% would contribute more using voluntary enrollment. So, a year’s tradeoff might be estimated as:
o 12% (40% of 29%) say they would have contributed more,
o 17% (rest of 29%) would have contributed 3% or less anyway,
o 46% more (for a total of 75%) are automatically enrolled, and
o All 75% are “teed up” for automatic escalation.
Remember, EACH and EVERY worker who allowed a 3% default to take effect was specifically notified of their opportunity to enroll - and select a different contribution rate. Fact is, many, if not most, would not be contributing except for automatic enrollment.
Your average contribution rate comparison of participants may be misleading since most companies still limit automatic enrollment to new hires - in a voluntary enrollment plans, fewer participate, and those that do tend to be higher paid, older and with longer service. For example, one AonHewitt study showed an average contribution rate decline from 7.9% (2006) to 7.3% (2009). However, the 2006 & 2009 populations were very different — by 2009, many were contributing 3% specifically because of the increased prevalence of automatic enrollment. AonHewitt published a study of 120 large employers in May 2011, showing:
o 2010 participation of 75.8% vs 73.7% in 2009,
o ~60% of 2010 plans had auto features vs 24% in 2006.
So, a better contribution rate comparison uses the average deferral percentage (ADP) — when non-participant zeros are included in your averages, it offers a much more accurate measure of how automatic features change savings behavior.
To conclude, yes, automatic features/designs do make a big, big difference. But, automatic features, done right, ensure higher levels of participation, higher contributions and over time, higher average contributions. Automatic best practices include PERENIALLY:
o Enrolling all eligibles, and
o Increasing contributions for all who are saving less than a target level (12%, 15%, etc.)
Change your headline. Automatic enrollment increases participation, it increases the total amount saved by all eligibles, and over time, done right, it will also increase the average contribution rate.