It's no secret that automatic enrollment provisions in retirement plans improves participation rates. Most providers (especially those with asset based fees) laud all automated features that push assets into a retirement plan as a proven mechanism to improve "retirement readiness" for employees. While it may boost account balances in the plan, and fee-based providers revenue stream, it may have a different effect on a family's net worth.
Why Net Worth Matters
Net worth measures the total wealth of an individual/household, taking into account all assets and liabilities. This includes the assets in company retirement plans, but it goes much further. Many Americans live paycheck to paycheck and don't have much flexibility inside their budget. Saving an extra dollar in a 401(k) means not spending that dollar on something else such as buying healthy food, repairing a vehicle, or saving for a much needed vacation. The current inflation rate has made things even harder for families.
401(k) plan metrics like participation rates and deferral rates don't measure the impact that retirement contributions have on households' net worth, only the impact on the plan. In designing and evaluating a retirement benefit plan, employers should consider whether, and to what extent, automating enrollment and contribution escalation will impact employees bigger financial picture. If employees spend $1 to get a $0.25 matching contribution, but that dollar means $1 in groceries is added to their already high credit card balance with a 22% APR, it may not be in their best interest to contribute to the plan right now as the interest could be expected to accrue faster than the earnings in the plan. When this happens, net worth decreases even though the plan balance and all the key plan metrics look better. It's not about the plan, it's about the people.
But Employees Could Just Opt Out, Right
Without automation, employees have to do something to participate - it takes a conscious effort to setup an account, chose investments, name a beneficiary, etc... The same holds true on the flip side - with automation, employees have to do something to stop the contributions. The psychological barriers to stopping contributions are significant. It forces employees to acknowledge that they aren't taking full advantage of company benefits, that they are likely falling behind their peers in retirement savings, and can experience a since of shame and hopelessness by opting out. This, along with inertia, are key reasons for opt out rates being comically low with automatic enrollment provisions.
On the flip side, when employees opt in, they feel like they are doing something good. The inertia is still in play but instead of shame, there's a sense of accomplishment and security that employees get from starting to contribute.
Company retirement plans can be an excellent tool for saving. They can also destroy wealth when used inefficiently. The best workplace savings programs recognize that every employee has unique financial circumstances and there are no one-size-fits-all solution that's best for employees. Consider offering your employees a financial solution that optimizes their family's net worth, not just their retirement plan balance!
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