Automatic savings plans could be treated like ATMs

Thanks to automatic savings plans, it’s become easier to help people put money in their retirement accounts. But when it comes to keeping that money in, things aren’t much easier.

That’s the conclusion of a new study from academic economists focused on retirement-savings plans in the US. “Within eight years of joining a 401(k) plan, the results indicate that automatically enrolled workers withdraw nearly half of the extra they manage to save, compared with workers left to sign up for the retirement plan on their own,” reported the Wall Street Journal.

Citing figures from 401(k) record-keeper Alight Solutions, the Journal said auto-enrollment has pushed average participation rates in 401(k) plans above 85%, compared to 63% for plans without the feature. Because automatically enrolled employees are typically swept into accounts with default savings rates near 3%, a lot of retirement accounts with relatively small balances are created initially.

A little over 60% of 401(k) participants whose balances are below US$10,000 reportedly liquidate their accounts after leaving a company, according to US-based Retirement Clearinghouse. Such individuals end up paying income taxes as well as a 10% penalty.

“When people hardly have any money in the system, it doesn’t seem worth it to them to roll it over,” Lori Lucas, president of the nonprofit Employee Benefit Research Institute, told the Journal.

Workers who don’t switch companies, meanwhile, are tempted to borrow from their 401(k) accounts over time as they accumulate more money. Most 401(k) borrowers pay themselves back with interest, but around 10% default on some US$5 billion a year, according to Olivia Mitchell, an economist at the University of Pennsylvania’s Wharton School.”

“[While] balances under auto-enrollment are higher, they are not as high as they could be,” said Brigitte Madrian, a co-author of the new study and an economist at Harvard University.”

After adjusting for investment returns, the study found that eight years after getting hired, auto-enrolled employees had 401(k) account balances that were around US$1,200 more in 2004 dollars than workers who were hired a year earlier and had to sign up on their own.

But the auto-enrolled employees also withdrew an average of around US$850 more from their 401(k)s than those who had to voluntarily enroll. Proportionally, more of the auto-enrolled participants (59%) also cashed out their savings than the voluntary participants (43%).

The next step in retirement-account nudges, according to experts, should be to automate the process of transferring money from an old employer’s plan to a new employer’s plan. This is opposed to the current situation, where departing employees have to fill out paperwork before their money can be rolled over tax-free from their old retirement account.

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