by Rick Kahler
How hard is it to do things we know are good for us? Like
exercising more. Or saving for retirement.
This time of year, with broken New Year's resolutions piling
up like snowbanks, it's clear that the answer is "very hard." Most of
us have good intentions, but we aren't so good at taking consistent action to
turn those intentions into reality.
One of the areas where many people don't do what's best for
themselves is participating in company retirement plans. If your employer
offers a 401(k) plan, it's ridiculous not to participate in it. For one thing,
it's an easy way to put money away for retirement before you see it—and before
you pay taxes on it. Even better, the employer's matching contributions give an
extra boost to your savings that's almost like found money.
Yet studies have shown that only 67% of eligible employees
participate in these plans if they have to choose to sign up. When employees
are automatically enrolled in the plans and have to actively choose to opt out,
however, the level of participation increases to 77%.
For this reason, the US government in recent years is
encouraging large employers to offer automatic-enrollment retirement plans.
Yet a recent article in US News points out a downside to
this well-intentioned attempt to save procrastinating non-savers from
themselves. Plans with automatic enrollment may have higher participation, but
that doesn't necessarily mean greater benefits for employees.
When more employees participate in a 401(k) plan, the
employer has higher costs in the form of increased matching contributions. A study last fall by the Center for Retirement Research at Boston College found that
companies with automatic enrollment tend to compensate for those higher costs
with smaller matches. The average amount—3.2%, compared with 3.5% for plans
that don't have automatic enrollment—may seem insignificant. Yet over time it
can make a big difference in the amount of money an employee has available at
More importantly, the study also found that the default contribution
rate (the amount invested out of each paycheck) in some automatic-enrollment
plans resulted in employees saving less than had they chosen that amount themselves.
The default contribution rates are likely to be less than the rate required to
receive the employer's maximum matching contribution. The default investment options
also tend to have underperforming investment choices compared to those chosen
independently by participants.
One rather obvious conclusion of the study is that automatic
enrollment means more retirement savings for employees who otherwise would not
have signed up for a 401(k). At the same time, because of the lower employer
matches, employees who would have chosen to sign up anyway are likely to end up
with less retirement savings than they would have in a non-automatic plan.
Does this mean automatic-enrollment 401(k) plans are not a
good option for retirement saving? Not at all. If you passively participate in
an automatic plan and leave your contributions at the default contribution
rates and investment choices, you'll still be better off than if you don't
participate at all.
Yet the research suggests that settling for the employer
defaults, a one-size-fits-most option, is probably not your best choice. You
can choose instead to educate yourself about the investment choices in a plan,
contribute the maximum amount you can, and take full advantage of the employer
match. The more you learn about the available options, the better choices
you'll be able to make.
Ultimately, no employer or plan manager will ever care more about your
investments than you do. The most successful retirement savers are still those
who take responsibility for their own future.
Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!