If I've learned anything from the past week (or ever), it's to never anticipate effectual planning from Washington. Something always gets caught under the wagon wheel.
Take, for example, when a recent Wall Street Journal article examined a potentially flawed design in the Pension Protection Act of 2006. WSJ reports the law's encouragement of automatic enrollment in 401(k) plans undermined savings rates because people put away less money than if they were left to enroll voluntarily.
The Employee Benefit Research Institute backed this up, but I was disappointed the story didn't cover both sides. Yes, automatic enrollment can result in lower deferral rates, but that doesn't necessarily mean the law specifically inhibits savings, or that automatic enrollment is sabotaging retirement. If you ask EBRI, they'll tell you auto-enrollment is one of the best plan features for the lowest-income 401(k) participants. And a new Fidelity survey shows 20 percent of workers wouldn't be saving at all if they didn't have a retirement plan at the office.
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But new analysis released by Mercer this week confirms automatic enrollment on its own is not enough to provoke substantial retirement savings. In fact, says Dave Tolve, US Retirement Business Leader for Mercer's Outsourcing business, "Historically, 70 percent of our automatically enrolled participants never change their contribution rate, which is of real concern for sponsors who want to help participants save for a successful retirement."
Where's the saving grace? Mercer's study of more than 1 million participants in DC plans found participants who were automatically enrolled in their plan and participate in an automatic contribution increase program have a 25 percent higher contribution rate than those who don't use automatic deferral increases.
| Average contribution rates for participants automatically enrolled*: | Average contribution rates for participants self-enrolled: | |
| Participants not enrolled in automatic contribution increase | 3.5% | 8.5% |
| Participants enrolled in automatic contribution increase | 4.4% | 7.4% |
"Clearly, it is important for plan sponsors to understand the difference in behavior and engagement between self-enrolled and automatically enrolled participants," says Tolve. "Those who self-enroll and set their own contribution rate are contributing nearly two and half times those who are automatically enrolled. While automatic enrollment obviously increases overall plan participation, it does little to overcome the inertia of unengaged employees. While further enhancing DC plans with automatic increase features does drive increased savings, there is no comparison to the contribution and account values of actively engaged participants who consciously make retirement savings decisions."
So maybe the PPA does have a consequential side effect. Anyone who knows anything about health reform knows sweeping regulation has a habit of doing that.
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