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The Battle Over Automatic Retirement Plan Enrollment

The numbers say it works, but there’s plenty of pushback.

With the well-publicized retirement crisis looming, one might assume that any solution that leads to increased retirement savings would be welcomed with open arms. —Not so fast.

Industry observers often set the amount of their pay that plan participants should strive to contribute in order to ensure a secure retirement at 10 percent. Fewer than 10 percent of employees meet that threshold.

According to recent research by Cerulli, employees whose companies automatically enroll them in retirement plans are far more likely to save at least 6 to 10 percent of their pay.

When the automation is taken a step further, and plans automatically escalate all participant contributions over time, the results are even more pronounced. Forty-seven percent of employees whose contributions automatically escalate meet the lowered bar of contributing 6 percent of their pay, as opposed to only 27 percent in plans that don’t escalate automatically. Roughly twice as many participants in plans that automatically escalate contributions for everyone reach or exceed the 10 percent savings level as those in more traditional plans (4 percent).

However, despite the numbers being in their favor, automatic enrollment plans are fairly unpopular with employees, particularly those with the fewest investable assets.

According to the study, “The employees who need to save the most are often most resistant to automatic enrollment and escalation features ... individuals in the lower investable asset tiers and who make the lowest or no deferrals to the 401(k) plan are the most resistant to automatic enrollment.”

Almost half of employees (43 percent) with under $100,000 in investable assets oppose automatic enrollment; the average for all respondents was 38 percent. It’s important to note that these number don’t quite capture the full extent of the disconnect, as the average includes the first (large) group. The 43 percent opposition is some 10 percent higher than reported in any other wealth group.

The major difficulty here, according to Cerulli, is that this group’s opposition appears based largely on principle—“I think it’s not the employer’s right to decide”—which can present a tough nut to crack. The study suggests targeted education focusing on some of the positive elements identified among those in favor of automatic enrollment, namely that automated features act as a valuable nudge to those employees dragging their feet on saving and can be a vital reminder for those who would otherwise forget.

Whether these talking points will be enough to overcome the stigma employees may place on losing even more control over their paychecks is anyone’s guess.

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