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Should Congress Mandate Retirement Plan Auto-Enrollment?

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Close to 62 percent of large employers are offering automatic 401(k) enrollment as of January 2015, a significant increase compared to 2014, according to a recent Callan Investment Institute study. Along those lines, a 2014 Aon Hewitt report showed an uptick in participation from 81.4 percent in 2013 to 84.6 percent in 2014 among those companies.

According to the same Aon Hewitt study, however, the participation rate among plans without automatic enrollment dropped from 63.5 percent to 62.4 percent, and participants’ contribution cutbacks also resulted in a stagnant average savings rate of 7.5 percent. At a time when the average worker needs to be saving more to provide for a long, expensive retirement, these stats suggest a need for more widespread auto-enrollment among employers large and small.

Is a nationwide mandate for private employers’ auto-enrollment on the horizon? Given recent state and federal legislation, it doesn’t seem out of the question. Illinois just passed its Secure Choice Savings Program, which will mandate automatic enrollment for Roth IRA payroll deductions by July 2017. Congress also passed the Smart Savings Act, which backers expect to increase investment returns by changing the auto-enrollment for federal employees’ Thrift Savings Plan from the conservative G-Fund to the higher risk L-Fund.

A federal mandate for private employers may not involve the 401(k) or other traditional options, though. “I think automatic enrollment is coming really soon, but the myRA account is the perfect vehicle to become automatic at some point,” said Jamie Hopkins, American College Professor of Taxation. “I don’t think it will happen really soon, but it’s setting the groundwork for the mandate.” The myRA, an option created for workers without employer-sponsored plans, is essentially a Treasury bond-based Roth IRA with automatic payroll deductions and a $15,000 limit. Because the myRA requires no fees from investors and involves little to no cost to employers, a mandate will likely be more feasible for it than for the 401(k).

A mandate would also likely include an opt-out clause, according to both Hopkins and Michael Foguth, Founder of Foguth Financial Group. “What Congress is probably going to say is that you have to do something—say yes or no— and they’re hoping the majority will say yes,” said Foguth.

“I think that most people feel that Social Security is forced enough, and we’re not going to see a lot of other forced savings requirements,” added Hopkins.

As for the merits and impacts such a mandate might have, experts are split. On the one hand, most small employers aren’t offering retirement plans at all, and companies that don’t auto-enroll only see about two-thirds participation.

“Given the tremendous amount of people who don’t participate and aren’t covered, the impact would be pretty big,” said Hopkins. “It would get people into a plan early on, when they don’t have access to an employer-provided plan and create that personal savings habit. That might actually be more important than the dollar amounts they’re going to be saving.” Were workers to start saving earlier and in larger numbers, it’s possible that late Boomers and younger generations would be far more prepared for retirement than today’s seniors, he added.

On the other hand, an opt-out option and low automatic contribution percentages might limit the effects. “People who aren’t already educated about the benefits of saving will just opt out,” said Foguth. “I think the impact would be small because there’s no proposed education behind it.” Even for those who opt in, the default contribution amount is typically small – in the neighborhood of three to four percent—and workers who aren’t already keen on saving could be unlikely to contribute the ten percent or greater many advisors recommend. “A better option would be to mandate education to show people how much they can ultimately save by setting aside even a little bit,” Foguth added. “That would make enrollment go way up.”

Whether or not a mandate does pass, that kind of education is what workers need, particularly those who are saving minimally or not contributing to a retirement plan at all. “This is why we have jobs – to show our clients and people in need that if they start saving properly today, they’ll have enough to retire,” said Foguth. For current clients who have the means to save and invest significant portions of their income, mandated auto-enrollment should have little effect on their plans and prospects.