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A New Bill Would Require Automatic 401(k) Plan Enrollment

But with many exemptions, the legislation is unlikely to make a substantial difference.

Automatically enrolling workers in a retirement plan is one of the most powerful tools policymakers and retirement plan sponsors have found to increase retirement savings. A bill making its way through Congress adds an automatic enrollment mandate, but it will likely have a minimal impact over the next few years because it exempts most retirement plans.

To be clear, expanding automatic enrollment is a worthy goal. In several studies for the Employee Benefits Research Institute, my colleague Jack VanDerhei concluded that such programs combined with automatic escalation can dramatically increase retirement savings. For example, EBRI found that the median projected balances of the youngest workers (that is, workers aged 25-29) increased to more than 6.0 times final earnings in the auto-enrollment scenario from 1.5 times final earnings under voluntary enrollment. (Of course, Jack would be the first to tell you that these projected outcomes are higher for younger workers than for their more-senior counterparts.)

The Secure 2.0 Approach Will Not Dramatically Increase Automatic Enrollment

This new bill—”The Securing A Strong Retirement Act Of 2021″—would require new plans to automatically enroll participants at the start of 2023. Although the provision would not apply to plans that are already in place, we have found that employers create around 41,000 new retirement plans every year, leading to some hope this could be a meaningful step toward expanding retirement savings.

Unfortunately, most of these newly created plans are small, covering fewer than 100 participants—typically far fewer. Further, the bill exempts government and church plans and employers with 10 or fewer regular employees.

Excluding employers with 10 or fewer workers means the new law would require few new plans to automatically enroll participants. (Note that we will use the number of plan participants we see in new plans as a proxy for employees, because that’s the data available.)

The bottom line is that if new plan creation in the 2020s is somewhat similar to new plan creation from 2011 to 2020, the new law would require just under 30% of new plans (around 12,300 plans a year) to auto-enroll workers. It’s worth noting that this could be substantially lifted to just under 45% if plans with 5 or fewer participants instead of 10 were exempt.

Of course, this analysis is not complete. An optimist might point out that some of these small plans could eventually become big plans; a pessimist might argue that such a requirement could chill employers’ interest in offering a plan at all.

Either way, the effort to find ways to get more people enrolled in retirement plans automatically is still worthwhile, and this approach could certainly make a difference for some participants. It also signals the importance of automatic enrollment as a bipartisan goal, which certainly has some value.

A Stronger Mandate Is Necessary to Dramatically Move the Needle

In the fall, on a partisan basis, Congress seriously considered much more-expansive automatic enrollment and coverage requirements that would put many more Americans in retirement plans. While those efforts are on hold for now, individual states continue to create various kinds of automatic individual retirement plan programs, in which workers save for retirement unless they opt out.

The early data on these programs reveals that while many people opt out, a majority stay in and at least somewhat improve their prospects for retirement. The latest federal efforts do not look like they will have nearly as much of an impact, but they provide a basis for further expansion of automatic enrollment requirements.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Aron Szapiro

Head of Government Affairs
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Aron Szapiro is head of retirement studies and public policy for Morningstar. Szapiro is responsible for developing research reports on policy matters, coordinating official responses to regulatory proposals, and providing investor-focused comments on policy issues to clients and the press. He also chairs Morningstar’s Public Policy Council. Szapiro also heads the Morningstar Center for Retirement Studies. His research has been covered in The New York Times, The Wall Street Journal, The Washington Post, The Journal of Retirement, and on National Public Radio.

Before assuming his current role in June 2021, he served as Morningstar’s head of policy research and as policy and finance expert at HelloWallet, a former subsidiary of Morningstar. Previously, he was a senior analyst at the U.S. Government Accountability Office (GAO), specializing in retirement security issues and pension plan policy. He also worked at the New Jersey General Assembly Majority Office.

Szapiro holds a bachelor’s degree in history from Grinnell College and a master’s in public policy from Johns Hopkins University.

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