A decade ago, the U.S. Congress said companies could tweak retirement plans to get a lot more workers to save. The 2006 Pension Protection Act made clear that employers were allowed to automatically sign up employees for a 401(k), and automatically increase their contribution percentage year after year. Employees could still change their plan or opt out, but most weren’t expected to bother.
At first, companies were enthusiastic. Employers switched to automatic plans in droves. By sparing workers extra paperwork—and making the investment decisions they didn’t feel qualified to make—auto-enrollment could boost 401(k) participation rates as high as 95%. Auto-escalation could nudge workers to take full advantage of an employer’s match and save the 10% or more of salaries they generally need to retire comfortably.
Ten years later that momentum has completely stalled, and it turns out the big reason is cost. According to the latest survey by the Society for Human Resource Management of its HR professional members, fewer than 40% of employers offer auto-enrollment for new employees and almost 20% offer auto-escalation–numbers that actually fell slightly in the past few years. (This isn’t to be confused with reenrollment, in which employers automatically change the investment mix. Employers can also auto-enroll existing employees, something 21% do.)
While they don’t fully replace traditional pensions, which have disappeared from most American workplaces, 401(k)s do give millions of people some needed extra money in retirement. If every employer auto-enrolled workers, retirement incomes would rise 5% overall and 10% for the poorest 25% of Americans, the U.S. Government Accountability Office estimated in May. If workers were nudged to take full advantage of their employers’ matching contributions, retirement incomes would go up 13% overall and 31% for the poorest Americans.
What’s gone wrong? Retirement experts, including organizations that represent employers and 401(k) plan providers, still enthusiastically endorse automatic 401(k) features. The problem is that companies remain skeptical. The top reason, according to organizations that talk to these holdout employers, is concern about how expensive all this can be.
By getting more workers to increase contributions to their 401(k), you potentially raise the amount you’ll need to pitch in as a matching contribution. If you match the first 3% that workers put in, for example, and you get another fifth of your workforce to meet that threshold, then auto-enrollment can look like an expensive decision. But auto-enrollment rarely costs as much as employers fear, says Tony Verheyen, executive director of the Plan Sponsor Council of America, a group representing more than 1,000 employers. Companies underestimate how much other costs will fall as their retirement contributions go up. For example, employers will lower their payroll taxes, and sometimes workers’ compensation expenses, by diverting more of their salaries into pretax retirement accounts. They also forget how much adjusting the match formula can reduce the financial hit, he says. Instead of matching the first 3% of salary, dollar for dollar, for example, employers can stretch out their contributions. “There are a lot of plan-design decisions you can make that will minimize the costs,” Verheyen says. Other employers just don’t like the idea of changing a 401(k) automatically, fearing resistance from their workers. Generally, though, employees appreciate the help. According to a survey released last month by the Transamerica Center for Retirement Studies, 71% of workers find auto-enrollment “appealing,” and 67% like the idea of auto-escalation.