Auto-Enrollment’s Downside

By John Iekel • May 31, 2018 • 0 Comments
This is auto-enrollment’s day in the sun. Widely lauded as a low-cost, low-impact solution for savings rates and behaviors that could use a boost, it’s easily regarded as a panacea. But a recent blog post suggests that it may not be.

In “The Dirty Little Secret of Auto-Enrollment?” a post on Cammack Retirement’s “Insights” blog, Michael Webb points out that even something as popular among plan sponsors as auto-enrollment can have a side that’s, well, at least somewhat undesirable.

So what are auto-enrollment’s sins? First, Webb argues that it can result in lower average account balances, an effect he says is particularly pronounced at employers with high turnover rates. Smaller balances, he notes, result in higher fees.

Second, Webb cites a Harvard study, “Borrowing to Save? The Impact of Automatic Enrollment on Debt,” in which the researchers say that an additional downside of auto-enrollment is debt. More precisely, they found that participants who were auto-enrolled incurred more debt than those who were not.

This, Webb says, should not be a complete surprise. He says of this finding that “it is consistent with the notion that if we are forcing people to save their earnings via auto-enrollment, this earnings reduction can only be offset by either increasing earnings, reducing expenses or incurring debt for something the earnings would have normally been used to finance.”

The answer? Webb suggests that this result highlights the importance of making sure that when auto-enrolling employees in its retirement plan, an employer also offers a robust financial wellness program. This, he posits, will help equip employees so they “are not simply exchanging savings for debt.”

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