Sunday, May 19, 2013

More or Less?

Earlier this week, the Wall Street Journal’s Anne Tergesen wrote a story titled “Mixed bag for auto-enrollment.” Citing data presented at last week’s EBRI policy forum,¹ the article claimed “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.”

She then proceeded to cite Aon Hewitt data presented at the policy forum that illustrated how workers at various salary levels at plans that offered automatic enrollment saved at a lower rate, on average, than workers at the same salary levels at plans that didn’t offer automatic enrollment. The article then went on to note that “The data confirms an analysis EBRI performed for The Wall Street Journal in 2011.”

Well, not exactly.

In a response to an article titled “401(k) Law Suppresses Saving for Retirement” that Tergesen wrote in 2011, EBRI Research Director Jack VanDerhei challenged the premise behind the headline of that article, explaining that it “…suggests that it is actually reducing savings for some people. What it failed to mention is that it’s increasing savings for many more—especially the lowest-income 401(k) participants.”

Not only that, he took issue with the conclusion, explaining that “The Wall Street Journal article reported only the most pessimistic set of assumptions and did not cite any of the other 15 combinations of assumptions reported in the study.”

The other statistic attributed to EBRI in the original WSJ article dealt with the percentage of automatic enrollment-eligible workers who would be expected to have larger tenure-specific worker contribution rates had they been voluntary enrollment-eligible instead. The simulation results EBRI provided showed that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a VE plan, and that over time (as automatic escalation provisions took effect for some of the workers) that number would increase to 85 percent (see chart below).

AE.NA-blog.17May13Are there those who once might have filled out an enrollment form and opted for a higher rate of deferral (say to the full level of match) that now take the “easy” way and allow themselves to be automatically enrolled at the lower rate adopted for most automatic enrollment plans? Absolutely. However, as the EBRI data show—and, for anyone paying attention, have shown for years now—the folks most likely to be disadvantaged by that lack of action are higher-income workers.

In fairness, while that 2011 article was titled “401(k) Law Suppresses Saving for Retirement,” the more recent coverage not only characterized automatic enrollment as a “mixed bag,” but acknowledged the “very positive effect on participation rates” as a result of automatic enrollment.

Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (until design features like automatic contribution acceleration kick in). Said another way, participation rates go up, and AVERAGE deferral rates dip—at least initially.

That might, in fact, mean that some individuals do, in fact, save less by default² than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default.

But that ignores the reality (borne out by the data) that many workers will be saving more—because that initial savings choice was automatic.

Nevin E. Adams, JD

¹ Materials from EBRI’s 72nd Policy Forum, including a link to a recording of the event (courtesy of the International Foundation of Employee Benefit Plans) are online here.

² EBRI has recently considered how much difference setting a higher default contribution rate can make in improving retirement readiness. See “Increasing Default Deferral Rates in Automatic Enrollment 401(k) Plans: The Impact on Retirement Savings Success in Plans With Automatic Escalation,” online here.

No comments: