Encouraging Retirement Savings: For many years, public policy analysts have offered various solutions to the problem of a low national savings rate in the United States. The gist of one much discussed proposal was that, instead of the usual situation in which corporate employees must elect to opt into 401(k) plans, they should be automatically enrolled, while also, of course, retaining the right to adjust their rates of contribution or to opt out completely.

Moreover, proponents of this approach typically have argued for making these automatic savings plan enrollments at the maximum allowable contribution rates. Since there traditionally has been a great deal of inertia among retirement savings plan participants, this seemed to be a logical public policy initiative. That is, both formal academic studies and anecdotal evidence have repeatedly confirmed that relatively few corporate retirement plan participants are likely to change their initial elections regarding rates of contribution and investment options. 

Thus, relying on the natural inertia that most people manifest in such matters, relatively few of those employees thus enrolled would be likely to make the effort to change their auto-enrolled savings elections, and among these auto-enrolled participants would be many who otherwise would not have bothered to sign up for their employers' retirement savings plans otherwise. A key enabling piece of federal legislation in this regard was the 2006 Pension Protection Act, which swept aside state laws against auto-enrollment and which shielded employers against suits from auto-enrolled employees who later were dissatisfied with their investment returns.

The good news, for proponents of increased national savings, is that total participation in 401(k) plans has shot upward in the wake of this legislation, beyond the trend existing before the 2006 law.

The bad news, however, is the average savings rate has gone down. This unintended consequence, additionally, seems completely counter intuitive on the surface. The reason, though, is that the default employee contribution for auto-enrollees is typically set at 3% of salary or less. A survey indicates that at least 40% of the participants thus enrolled would have made much higher elections if they had to do it themselves, typically in the range of 5% to 10%. Passivity on the part of employees, it seems, cuts both ways. That is, just as relatively few auto-enrolled employees take active steps to reduce or cancel their 401(k) plan contributions, a similarly small number of them take the necessary actions to increase their contribution rates. In response, policy advocates concerned about the national savings rate might argue that companies should set the default plan participant savings rates higher, but it is clear that most employers apparently feel otherwise, perhaps concerned about causing short term hardship among the many employees who basically live from paycheck to paycheck.

Source: See "401(k) Law Suppresses Saving for Retirement" in The Wall Street Journal, July 7, 2011.

Upshot: This matter is something for human resources professionals and their financial services counterparts (such as financial advisors or financial planners) to consider when designing 401(k) and other retirement savings plans that will succeed in building sizable nest eggs for their employees, or in advising their clients on how best to utilize such plans for the same purpose. Moreover, if you are an auto-enrollee yourself, you should take another look at your own situation. Are you saving as much as you can, or should?