More than ever, employers are incorporating auto-enrollment features into workplace retirement plans. When participants are auto-enrolled, they get the benefit of contributing without having to lift a finger. The laws of inertia apply to finance as well as to physics: if an employee is moving on the road toward a secure retirement, they tend to keep moving and keep making contributions. If an employee is not contributing, they probably won’t start.
Participants can still opt out if they’d like, of course. But there’s a clear benefit if they don’t.
According to a recent report by 401(k) record-keeper Alight Solutions LLC, 85% of employees contribute to their retirement plan when it includes an auto-enrollment feature. Without auto-enrollment, fewer take advantage (63%). In other words, one in four employees who contribute to their plans wouldn’t do so if their employer hadn’t automatically signed them up.
Unfortunately, there’s a dark side to all of this, and it causes many to make a wrong turn. Increases in auto-enrollment seem to be leading to more early withdrawals from retirement accounts. According to the Wall Street Journal and Retirement Clearinghouse LLC, over 60% of retirement plan participants with balances of less than $10,000 cash out their accounts after leaving a company, a habit that was found to be much higher among those who were auto-enrolled instead of those actively choosing to contribute.
Again, inertia at play. It’s usually less work to simply cash out your account than to roll it over to your new employer’s plan or into an IRA. To the uninformed, why not? It’s a quick source of cash for paying off debt or taking a trip! And, since you’ve just left one employer and are still establishing your place with a new one, it may be comforting to have extra cash easily accessible in a checking account. But workers who made their own wise decision to sign up for contributions are presumably also wise enough to roll that money over into a new plan, knowing the financial sting that a withdrawal can bring about.
Those who choose to take the easy route and withdraw will realize the extent of their mistake later, when they see the large cut that taxes and penalties take out of their money. Worse yet, they probably don’t comprehend the fact that they are killing the “engine” that will create a paycheck for them after they retire. Clearly, this is dangerous ground and underscores just how bad the need is for retirement plan and investing education.
It Gets Worse
It’s not just those who leave the company who are at risk. Those who stay in the auto-enrolled program, unfortunately, appear to be prone to their own version of hazardous behavior: racking up debt at a faster clip. Per a Wall Street Journal article and a 2018 report from Alight Solutions LLC, those who were auto-enrolled into the retirement plan were more likely to take on new car and mortgage debt. Effectively, any benefit from auto-enrollment is quickly negated.
The Limits of Auto-Enrollment
So it appears that auto-enrollment by itself may not be the magical panacea once thought. Fortunately, there is a way to use it and achieve better participant outcomes: pair it with a good financial wellness or participant education program.
The Need For Effective Education
The need for education is painfully obvious. Simply auto-enrolling is clearly not enough. Participants need at least a basic understanding of why the auto-enrollment happened, and how to make sure they retain the benefits of this action. This significantly boosts the odds of them finding success in retirement saving.
Fortunately, according to a recent Bank of America Merrill Lynch report, participants are enthusiastic about financial wellness programs: 91% of employees who participate in a workplace financial wellness program say these resources have been effective.
So the challenge should be to pair such programs with auto-enrollment, so participants are given the chance to get educated about their new accounts and how to get the most out of them.
What’s the Message?
Of course, it has to be the right education. Simply giving people resources on how to do a budget is not likely to help, as those resources are already everywhere, like caution signs on the road that people speed right past. We need to create awareness that change is possible. That’s important, since financial stress and debt can feel inescapable.
Many people live on auto-pilot and are expert spenders, but really don’t know how to save or watch their money. They also are likely to feel very busy, so they need things in actionable easy steps.
This is important emotionally, too. Telling someone to “pay off all your debt” is not an easy step; it’s so overwhelming, and may feel so impossible, that the person can’t even begin to try. But asking someone to look around and save a few dollars a day by choosing regular coffee instead of a large latte, or using a coupon for their next oil change, are much more feasible, accessible ways people can start to feel in control of their finances.
But more important, we need to strive to change attitudes. Spenders love to spend. Savers love to save. Most spenders haven’t thought about the role advertising plays in their lives, and the fact that much of their desire to buy and spend may have been created by smart “mad men” and women in the advertising industry. Asking spenders to think about that, and giving them easy mindful spending tactics to help them take the time to figure out if they really “need” something, are far more effective than telling them they just shouldn’t spend so much.
Plan sponsors want the best for their participants, and auto-enrollment is a great strategy. Based on the evidence, though, it’s recommended that any auto-enrollment be paired with a financial wellness program. While financial wellness was previously quite expensive, affordable financial wellness programs are now available to make this option more accessible to plans of all sizes, and employers who take advantage of these programs will be doing their employees another valuable service.
Because when a company sets up an auto-enroll program for their employees, it sets them off on a road to financial security. To keep them on that road, however, employees must know how to navigate it and avoid the tempting but hazardous wrong turns along the way.
Wavelength Financial Content Inc. provides affordable white-label financial wellness programs for employers and financial advisors. Learn more at https://wavelengthfinancial.com/financial-wellness/.