If Auto-Enrollment Isn’t Quite Enough, Why Not Make it Better?

If you’re like me, you have no interest in foolishly looking at the dwindling numbers in your retirement plan. Luckily, I’m decades away from retirement and can afford occasional market volatility. My initial concern during this crunch, however, wasn’t the fluctuating values in our nest eggs. Instead, my worry was that employers might draw back from automatic enrollment programs, and that new employees might consider opting out of plans more frequently. Not so, according to people smarter than myself. According to a recent Chicago Tribune article, not only has the number of companies automatically enrolling employees in retirement plans doubled, but there shouldn’t be much cause for concern that, despite what looks like prolonged doom and gloom for our economy, companies may find auto-enrollment less attractive.

For behavioral economists (and their many fans), this probably comes as no surprise—default options work. What the article argues and suggests by its title, however, is that automatic enrollment (despite its increasing popularity) is insufficient in creating a robust nest egg at current match rates. Likely true, though the Tribune makes it seem as though auto-enrollment is a static business decision by saying that it “may create a false sense of security and discourage workers from putting more away.” A false sense of security is an issue, of course, but I would argue that a balance of $0.00 in an employer-sponsored plan is far, far riskier.

The real fix lies in automatic escalation—the next generation of automatic enrollment. Instead of automatically enrolling workers at a higher, static contribution rate, auto-escalation would simply add a higher percentage of the employee’s pay into the company plan over time (while still maintaining the opt-out option at any point). This strikes me as a way to solve the problem of insufficient funds without crippling an employer with mandatory higher match rates—though ideally, a company would increase its match rate if possible.

In 2007, according to the Profit Sharing/401k Council of America, 81.9% of eligible workers had balances in their plans—up from 78.9% in 2006. Those 3% may not have sufficient funds for retirement, but it’s certainly better than not contributing. The alternative to automatic enrollment isn’t forcing employees to fend for themselves, it’s nudging them toward even more beneficial decisions.

The past few weeks and months have taught us the value of savings and responsibility on a personal, corporate, and federal level. Automatic enrollment, by any measure, has been beneficial to America’s workers. The discussion shouldn’t be about how comprehensive it isn’t. It should be about how comprehensive it can be.