This time of year, with broken New Year’s resolutions piling up like snowbanks, it’s clear that the answer is “very hard.” Most of us have good intentions, but we aren’t so good at taking consistent action to turn those intentions into reality.
One of the areas where many people don’t do what’s best for themselves is participating in company retirement plans. If your employer offers a 401(k) plan, it’s ridiculous not to participate in it. For one thing, it’s an easy way to put money away for retirement before you see it—and before you pay taxes on it. Even better, the employer’s matching contributions give an extra boost to your savings that’s almost like found money.
Yet studies have shown that only 67% of eligible employees participate in these plans if they have to choose to sign up. When employees are automatically enrolled in the plans and have to actively choose to opt out, however, the level of participation increases to 77%.
For this reason, the US government in recent years is encouraging large employers to offer automatic-enrollment retirement plans.
Yet a recent article in US News points out a downside to this well-intentioned attempt to save procrastinating non-savers from themselves. Plans with automatic enrollment may have higher participation, but that doesn’t necessarily mean greater benefits for employees.
When more employees participate in a 401(k) plan, the employer has higher costs in the form of increased matching contributions. A study last fall by the Center for Retirement Research at Boston College found that companies with automatic enrollment tend to compensate for those higher costs with smaller matches. The average amount—3.2%, compared with 3.5% for plans that don’t have automatic enrollment—may seem insignificant. Yet over time it can make a big difference in the amount of money an employee has available at retirement.
More importantly, the study also found that the default contribution rate (the amount invested out of each paycheck) in some automatic-enrollment plans resulted in employees saving less than had they chosen that amount themselves. The default contribution rates are likely to be less than the rate required to receive the employer’s maximum matching contribution. The default investment options also tend to have underperforming investment choices compared to those chosen independently by participants.
One rather obvious conclusion of the study is that automatic enrollment means more retirement savings for employees who otherwise would not have signed up for a 401(k). At the same time, because of the lower employer matches, employees who would have chosen to sign up anyway are likely to end up with less retirement savings than they would have in a non-automatic plan.
Does this mean automatic-enrollment 401(k) plans are not a good option for retirement saving? Not at all. If you passively participate in an automatic plan and leave your contributions at the default contribution rates and investment choices, you’ll still be better off than if you don’t participate at all.
Yet the research suggests that settling for the employer defaults, a one-size-fits-most option, is probably not your best choice. You can choose instead to educate yourself about the investment choices in a plan, contribute the maximum amount you can, and take full advantage of the employer match. The more you learn about the available options, the better choices you’ll be able to make.
Ultimately, no employer or plan manager will ever care more about your investments than you do. The most successful retirement savers are still those who take responsibility for their own future.