Automatic Enrollment: Unintended Consequences?

By John Iekel • December 05, 2016 • 0 Comments
Automatic enrollment can be an effective, low-impact way to increase participation in employer-provided retirement plans — and, in the process, further the real, ultimate goal of boosting retirement readiness. But we were taught that every action has an equal and opposite reaction, and that maxim may encompass auto enrollment, argues a recent story.

There is a body of research indicating that some automatically enrolled employees rack up debt as a result of their paychecks being reduced, says InvestmentNews’ Greg Iacurci. “New research suggests the effects of auto enrollment on participants aren't always rosy,” says Iacurci, citing presentations at the recent Defined Contribution Institutional Investment Association's (DCIIA) annual academic forum held in New York City.

Just over half of all 401(k) plans have automatic enrollment features, according to Plan Sponsor Council of America data that Iacurci cites. And the DCIIA itself has reported on the upside of automatic enrollment. In “Automatic Plan Features in Defined Contribution Plans: What’s in it for Plan Sponsors?” a white paper it released last summer, the DCIIA posits that there are short- and long-term financial benefits for employers that implement automatic enrollment, including:

  • enhanced workforce planning

  • higher employee satisfaction

  • increased defined contribution plan participation

  • higher DC plan contribution rates among NHCEs

  • reduced need for a nondiscrimination safe harbor

  • greater assets for a DC plan

  • stronger negotiating power regarding plan-related fees due to greater assets

But automatic enrollment can have an unexpected downside, according to Iacurci and the studies he cites. “While the practice of automatically enrolling employees into a company retirement plan does boost savings, it’s also correlated in some cases with increased consumer debt, serving as a counterbalance to savings benefits,” he says.

Iacurci notes that research by Harvard Business School Assistant Professor of Business Administration John Beshears and David Laibson and Brigitte Madrian, also of Harvard, found that over four years, the debt incurred by civilian employees of the U.S. Army who were automatically enrolled into the federal Thrift Savings Plan offset almost 40% of the contributions they made through automatic enrollment.

And they are not alone in their contention, Iacurci indicates. For instance, he notes, Chepenik Financial Managing Partner Jason Chepenik contends that unless employees are educated and have “basic financial stewardship skills, it’s a net-zero gain” and likens it to whack-a-mole. In similar fashion, he says, Jania Stout, practice leader and co-founder of the Fiduciary Plan Advisors group at HighTower Advisors, argues that education is necessary in order to keep debt from becoming an even worse problem for those automatically enrolled in retirement plans.