25 September 2006

automatic 401k enrollment

[This post starts slow, but the interesting point is at the end.] 401K's are a great deal (employer matching funds, tax-free interest), and make sense for pretty much everyone who's not completely desperate for cash. But people don't take them very often (40% of low-income workers, 50% of workers in their 20's). And it's probably not (just) because people don't want to save; it's more that they're paralyzed by inertia and having too many choices. This is evidenced by the fact that when people are enrolled by default in 401k's, most people (like 80%) stay enrolled and continue making whatever the default contribution is. (The sheep-like trust here reminds of this English guy I met who doesn't wash vegetables because "if they had toxic chemicals on them, the store wouldn't be selling them to us.")

Recently a new bill made it easier for employers to automatically enroll their employees in 401k's mostly by shielding them from lawsuits if the investments don't perform well. According to marketplace

[Harvard retirement scholar Brigitte Mandrian] expects more employers will migrate to automatic 401k enrollment. But slowly, cuz it's pricey. More employee savings means more matching funds from their bosses.
This is the weird part. Employers are doing something which costs them money, and, though it helps their employees, it only helps the employees who didn't really care about the benefit they're getting. The people who are excited about getting 401k's are probably the ones who'll enroll even if it's not the default. Could it be that the companies really do care about the welfare of their employees? Explaining Safelite Auto Glass's decision to automatically sign up their employees to invest 2% of their pay (matched by the company), Brenda Downing says:
We had a significant number of associates not saving at all. We were concerned they weren't going to be OK at the time they retired.
Is corporate benevolence really the only answer here? This is making my head hurt.


dabacon said...

Well one reason employers like this is that there are federal requirements for 401(k) participation across all income levels. And of course the financial corporations are all hugely behind this. Some would also argue that this bill also exacerbates the move away from fixed pension plans. Also note that the bill this was a part of increased contribution limits which will mosty have an impact on high income workers.

aram harrow said...

Thanks Dave! That's why I shoot my mouth off publically; to increase the chance that someone will be able to explain why I'm wrong.

Anyway, I can definitely see why corporations would like various aspects of the bill; it's just choosing to take advantage of the automatic enrollment that seemed stranger.