Nothing is Better for Thee Than Me

This old Quaker Oats advertising slogan¹ has relevance for your retirement plan.  I say nothing is better for your individual account retirement savings plan and its participants than automatic features done right. Depending on your circumstance, that may include defaults for automatic enrollment, automatic escalation, automatic re-enrollment and automatic re-investment using the Qualified Default Investment Alternative (QDIA). It may also include asset retention strategies and liquidity done right, such as the elimination of hardship withdrawals coupled with 21^st Century electronic banking/loan processing. 

Academics recently studied one employer’s experience from deploying automatic enrollment to new hires starting January 1, 2005. The study states, in part, “Employer adoption of automatic enrollment can dramatically increase retirement savings plan participation. However, many savings plan participants withdraw some, or even all, of their accumulated balances prior to reaching retirement.”² 

So, in comparing participation against periods before automatic features were adopted, they found:

• New hire enrollment was much higher, and   
• Account balances were noticeably higher eight years after hire.     

The researchers confirmed you can’t generalize these results elsewhere due to employer-specific differences in turnover and plan design. So, they suggest there is little value here for policy makers.  This is important because these researchers significantly overstated “leakage” by mischaracterizing outstanding loans among active employees as leakage.  Plan loans are NOT leakage unless they are not repaid – and studies show participants almost never default on loans while actively employed.  

Yet, somehow, results that show these increases in participation and improvements in assest accumulations were a net negative in the eyes of the Wall Street Journal - because participant accumulations didn’t match “potential” savings. The article³ notes:   

• Some workers are finding it hard to ignore the money they’re supposed to be setting aside for their golden years. 
• The findings illustrate how difficult it can be to change savings and spending habits. 
• (L)eakage, threatens to reduce the wealth in U.S. retirement accounts by about 25% when the lost annual savings are compounded over 30 years.⁴ 

The article misleadingly states that automatic enrollment contributions were “enforced” - prior to commencing contributions, and every day thereafter, the participant has final say in terms of whether to make contributions, to decide between pre-tax and Roth (if available), and to determine how much to contribute. Worse, the headline fails to note that the leakage is primarily among workers who separated. The article and the study both assert, perhaps incorrectly, that monies automatically contributed to the plan were “supposed to be” set aside for retirement. In fact, few workers are contemplating retirement when starting a new position.    

One of the researchers is quoted as stating that:

• Auto-enrollment “raised the firm’s 401(k) participation rate from 62% to 98%, converting many who would have contributed nothing into savers,” and that,
• While “balances under auto-enrollment are higher, they are not as high as they could be.”  

Because the studied plan had a dollar for dollar match on the first 4% of pay contributed and because the employer match was immediately vested, almost all participants benefited from the automatic features, net net – improving household wealth, net of taxes and net of any premature distribution tax penalties.  

So is this failure?  I’m reminded of a quote from my brother, Doctor Joe:  “If its and buts were candy and nuts, oh what a world it would be!” 

Long ago in April 2007, in my last plan sponsor role, we adopted automatic features (enrollment and escalation) to be applied to new hires and to every employee. We enrolled all workers at 3% if they were not contributing at least 3% of pay. In April 2008, we re-enrolled everyone at 3% if they were not contributing at least 3% of pay. In April 2009, in the midst of the Great Recession, we re-enrolled everyone at 4% of pay if they were not contributing at least 4% of pay. In April 2010, re-enrollment was at 5% of pay. In April 2011 and subsequent years, re-enrollment was at 6% of pay.  We consistently achieved 96+% participation every year after 2006. When workers complained, “How many times do I have to tell you that I don’t want to participate in this plan?” I always had the same answer, “Just once a year.”  In 2006, only 59% of eligible participants contributed enough to receive the full employer match.  In 2011 and later, 95+% received the full employer match.

Simply, done right, automatic enrollment enhances workers’ household wealth.  

¹Quaker Oats advertising pitch from 1950’s and early 1960’s commercials. 
²J. Beshears, J. Choi, D. Laibson, B. Madrian, Potential vs. Realized Savings Under Automatic Enrollment, TIAA Institute Research Dialogue, Issue no. 148, July 2018.  “We find that automatic enrollment increases total potential retirement system balances by 7% of starting pay eight years after hire; at the same time, leakage in the form of outstanding loans and withdrawals that are not rolled over into another qualified savings plan also increase by 3% of starting pay, offsetting approximately 40% of the potential increase in savings from automatic enrollment. The net effect is that automatic enrollment increases retirement system balances by 4-5% of first year pay eight years after hire.   … We do not know the extent to which the results at the firm studied would generalize to other populations.  The firm we study has a high employee turnover rate which, as we have documented in our analysis, is a key mediating factor contributing to retirement system leakage.  It also has a low default automatic enrollment contribution rate, and no employee match during the first year of employment when turnover is high, additional factors that also likely contribute to a relatively high rate of leakage. …Because turnover rates at this company are quite high, (we excluded …) 45% of the pre-AE cohort and 44% of the post-AE cohort. … At lower levels of tenure at separation, automatic enrollment shifts employees from having no balances at separation to having positive balances less than $1,000, and from having positive balances less than $1,000 at separation to having balances greater than $1,000 but less than $5,000. …  As tenure increases, so does the extent to which leakage offsets the savings increases from automatic enrollment, and eight years after hire, leakage, primarily in the form of plan loans, offsets 9-27% of the potential increased savings.  Overall, while automatic enrollment results in a net increase in retirement system balances, preretirement leakage significantly limits its potential impact.”  Accessed 8/20/18 at: https://www.tiaainstitute.org/sites/default/files/presentations/2018-07/...
³A. Tergesen, 401(k) or ATM? Automated Retirement Savings Prove Easy to Pluck Prematurely.  Researchers find that workers withdraw nearly half of their enforced contributions within eight years, Wall Street Journal, 8/10/18, Accessed 8/20/18 at:  https://www.wsj.com/articles/401-k-or-atm-automated-retirement-savings-p...
⁴A. Munnell, A. Belbase, G. Sanzenbacher, An Analysis of Retirement Models to Improve Portability and Coverage, Boston College Center for Retirement Research, March 2018, Accessed 8/20/18 at:  http://crr.bc.edu/special-projects/special-reports/an-analysis-of-retire...