19 January 2020

401(k) Auto Enrollment Trumps Debt Concerns

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Retirement specialists say most employers should stick with automatic enrollment into 401(k) plans despite new academic research that finds the practice appears to be driving up mortgage and auto debt among participants.

Neil Lloyd, head of U.S. defined contribution and financial wellness research at consulting firm Mercer, said the findings aren’t a total surprise. He cites a client with high employee turnover that recently added auto-enrollment only to reverse course after the number of 401(k) loans increased.

But, he said, the arrangement remains “a good solution for the vast majority of clients.”

The research, coming from a group of academic economists known for their work on retirement-savings plans, finds that civilian employees the U.S. Army hired in the 12 months after the federal government adopted automatic enrollment in its retirement-savings plan amassed an average of more than $5,000 in additional debt four years later, compared with civilian employees hired in the 12 months before auto-enrollment went into effect. That more than offset the additional $3,237 the auto-enrolled group contributed to the plan.

While the researchers conclude that the auto-enrolled employees do take on more debt, they said the debt isn’t of the type that would be clearly worrisome, such as credit-card debt and second mortgages that are often used to purchase consumer goods rather than assets. Some of the added debt, particularly mortgage debt, may even boost participants’ net worths over the long run, the authors say.

The findings are to be presented Saturday at one of the largest gathering of economists, the American Economic Association’s annual meeting.

Lori Lucas, defined-contribution practice leader at investment-consulting firm Callan LLC said employers should consider adding the so-called financial wellness programs that a growing number of 401(k) record-keepers offer, which aim to help 401(k) participants better manage their finances, including debt.

But rethinking auto-enrollment, she said, would be a mistake. “Auto-enrollment is the most successful way to get people into a plan and that’s a highly desirable outcome. I don’t think this research does anything to undermine that.”

Recently, a growing number of employers have boosted the percentage of workers’ paychecks that are automatically diverted to 401(k) plans above the long-term standard of 3%. Many are also automatically increasing employees’ savings rates by 1% a year unless the employees opt out.

Click here for the original article from Wall Street Journal.
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