Sunday, September 17, 2006

Who ARE Those Guys?

One of my favorite Westerns is “Butch Cassidy and the Sundance Kid,” and one of my favorite parts of that movie is the part where they are being pursued – relentlessly pursued – after a particular train robbery by an unidentified posse. As they fruitlessly try one thing after another to shake their pursuers, the two outlaws’ frustration mounts, moving from a “can you believe it?” incredulousness at their ingenuity to a “now what are we going to do?” exasperation – a range of emotions conveyed several different times – in several different ways – by the same phrase, “Who ARE those guys?”

In our industry, the pursued aren’t train robbers, but participants – or more accurately workers who could be participants. The posse trying to “catch” them includes employers, providers, and, yes, financial advisers. Over the years we’ve tried many things, with varying degrees of success, to get everyone who is eligible to save via these programs to do so: the logic of tax-advantaged savings, the allure of “free” money via the company match, the looming financial requirements of retirement. Still, despite our collective efforts over an extended period of time, in the aggregate, somewhere between one-in-four and one-in-five workers eligible to take advantage don’t.

Enter automatic enrollment. The logic behind these programs is almost indisputable. Without their impetus, 401(k) plan participation rates linger in the mid-70% range. With them in place, plan participation rates rise to – and apparently remain at – the mid-90% range. There are, of course, plans that attain that kind of result without automatic enrollment – and I’m sure there must be a plan somewhere that has adopted automatic enrollment that hasn’t been able to sustain such a robust increase in participation (though I’ve yet to come across it). Still, it’s hard not to like something that so readily appears to “fix” the problem of getting that last intransient group of people to take advantage of the benefits of their 401(k). If it isn’t a “silver bullet,” it’s darned close, IMHO.

But who are these 20% that wouldn’t/couldn’t’ expend the energy to fill out an enrollment form, but who WILL let someone take 3% of their pay? Were they interested but just too busy (or too lazy) to return the form? Could they not figure out how much they needed, or could afford, to save? Were they so befuddled by the array of investment choices that they decided to make no choice at all? Do they appreciate the fact that this “forced” savings is taking place on their behalf – do they even know that this new deduction is taking place?

Almost certainly “they” are some – or perhaps in some cases, even all – of the above. People who are full of good intentions frequently fail to act on them. The choices we ask non-investment experts to make are, indeed, complex. Perhaps automatic enrollment “works” because it makes it easy for workers to do the right thing. Perhaps it works – not so much in terms of getting people in their plan, but in terms of keeping them there – because the years of retirement savings messages really have had an impact. Perhaps, having suddenly found themselves saving for retirement, they decide to stick with it. Perhaps that first 401(k) statement (and the company match it displays) reinforces that decision. Perhaps it works because the still-typical 3% we take from their take-home pay is small enough either not to matter or to be seen.

Whatever the reason(s), for now, we can take some comfort in the impact of a solution that appears not only to be readily deployable, but to work, at least in terms of turning eligible participants into participants. However, I’d feel a lot better saying it worked if I felt like we had a more consistent understanding of why it does. Who ARE these guys, anyway?

- Nevin Adams

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