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.
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