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Commentary

Does Automatic 401(k) Enrollment Suppress Savings?

Recent EBRI research has found that auto-enrollment policies can have adverse side effects, affecting all involved.

Under legislation enacted in 2006, employers were given incentives to automatically enroll employees in 401(k) plans instead of leaving it to employees to enroll on their own initiative. Research by the Employee Benefit Research Institute has shown that the ensuing adoption of auto-enrollment policies has significantly increased 401(k) participation levels. EBRI also found that auto-enrollment has had some adverse side effects, which the Wall Street Journal took to mean that auto-enrollment had the effect of suppressing retirement savings. EBRI's findings and the WSJ's take on them illuminate some interesting aspects of 401(k) operations and touch on some of the deeper public policy issues that 401(k) regulation implicitly reflects.

Auto-Enrollment Equals "Suppressed" Savings?
The WSJ pointed to EBRI's finding that employees who would have enrolled in a retirement plan anyway, in the absence of auto-enrollment, saved less as a result of the auto-enrollment. Many employees who were enrolled at an automatic savings rate of 3%, for example, would have saved at a higher rate if they had been left to enroll on their own initiative. These voluntary enrollees often choose much higher (for example, 6%) saving rates. Hence the WSJ concluded that auto-enrollment suppresses retirement savings.