Savings Boost from Auto Enrollment Declines Over Time – Center for Retirement Research

40 percent of US private sector workers in the 401(k) retirement plan are in plans with automatic enrollment, and it is widely agreed that these plans are working well.

Now comes a more nuanced test, which finds it doesn’t work as well as everyone had hoped.

Research, conducted by some of the pioneers in auto-enrollment research, shows that many variables significantly reduce how much money is saved in 401(k)s. Workers often leave firms before their employer contributes matching funds, withdraws money from savings, or opts out of automatic increases in contributions designed to accelerate their savings further.

Automated enrollment still results in more savings than when employees are left to use their own devices. But their often-overlooked decisions “objectively reduce the impact of automatic policies on accumulation in America’s retirement savings plan,” the researchers concluded in their analysis of nine 401k plans.

Four of the companies they studied had recently adopted auto-enrolment. Five others added a second feature: an automatic increase in how much employees contribute to their savings plans. The goal here is not just to encourage more people to save – but to save more over time. Two of these firms already have an auto-enrollment facility and have recently introduced automatic contribution escalation, and three firms have introduced both features simultaneously.

To assess the effectiveness of the programs, the analysis compared the savings rate of thousands of workers hired by companies within a year of the new automatic enrollment policies with thousands who joined the previous year and were not affected by the policies put in place after they were hired.

At first, affected employees are more productive than employees without auto-enrollment programs. But the rate of savings has declined as researchers include real-world decisions by employees about how much to save and whether to stick with automatic contributions embedded in the program’s design.

Among the four firms that adopted only automatic enrollment, the average savings rate at the start was 2.2 percent of employee income higher than the rate of employees employed before the adoption of the policy. But this gap decreases over time to 0.6 percent when the ideals – that employees stick to their initial savings rate throughout the five years of the analysis, never withdraw money from their accounts, and fully vest – are reduced, and the data used in the account . analytics reflect employee behavior in the real world.

The savings rate also eroded in companies that automatically increased employee contribution rates. Another factor was that less than half of them accepted the first planned increase, a number the researchers called “surprisingly high.” Employees also withdraw money from their accounts or miss out on contributions from their employers.

For companies that signed up for automatic enrollment and later added automatic increases, the gap in the amount of savings between employees hired before and after the change narrowed from 1.8 percent of revenue at the beginning to 0.3 percent using actual behavior. For companies that adopted both of these factors at the same time, the gap decreased from 3.5 percent to 0.8 percent after discounting positive assumptions.

“Medium- and long-term forces,” the researchers concluded, “underestimate the effect of automatic enrollment and automatic increases in the savings rate on retirement savings.”

Reading this learn by James Choi, David Laibson, Jordan Cammarota, Richard Lombardo, and John Beshears, see “Less Than We Thought? The Impact of Automatic Savings Policies.”

The research reported here was conducted in accordance with a grant from the US Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium. The views and conclusions expressed are solely those of the authors and do not necessarily represent the views or policy of SSA or any agency of the Federal Government. Neither the United States government nor any of its agencies, nor any of its employees, makes any warranty, express or implied, or assumes any legal responsibility or liability for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any particular commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not imply endorsement, recommendation or favor by the United States Government or any agency thereof.