{"id":848,"date":"2011-08-02T21:16:05","date_gmt":"2011-08-03T02:16:05","guid":{"rendered":"http:\/\/pensionblog.com\/?p=848"},"modified":"2011-08-02T21:16:05","modified_gmt":"2011-08-03T02:16:05","slug":"solutions-to-prevent-automatic-enrollment-inertia","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2011\/08\/02\/solutions-to-prevent-automatic-enrollment-inertia\/","title":{"rendered":"Solutions to Prevent Automatic Enrollment Inertia"},"content":{"rendered":"

\"\"<\/a>There\u2019s been a lot of discussion recently about whether the automatic enrollment feature in many 401(k) plans actually leads to lower overall retirement savings rates. This blog post gives a brief overview of the issue and proposes a couple of solutions to combat automatic enrollment inertia and enhance employee engagement in the retirement plan.<\/p>\n

Background<\/strong>: Automatic enrollment is an optional 401(k) plan feature which allows employers to defer employee compensation into their 401(k) accounts, even if they haven\u2019t elected to do so (they can always opt out). A recent article<\/a> explained how 401(k) automatic enrollment may have unintended consequences.<\/p>\n

Automatic enrollment can overcome employees\u2019 initial inertia to saving more than 0% in the 401(k) plan (Participation Inertia), but it could unintentionally cause some employees to get stuck at the default rate (Default Inertia) instead of saving more.<\/p>\n

If we can agree that automatic enrollment is a good idea because it helps overcome Participation Inertia, then we just need to devise a solution to the Default Inertia problem.<\/p>\n

Solution #1<\/strong>: Add auto-escalation to the automatic enrollment option.<\/strong> As mentioned in the WSJ article<\/a>, this feature automatically increases the default deferral rate each year that an employee participates in the plan. For example, the automatic deferral rate might be 3% for new employees with 1% annual increases up to an ultimate deferral rate of 6% of pay after 3 years.<\/p>\n

However, even automatic escalation will eventually leave most participants at the ultimate default rate. And many of them will need to save more than this ultimate rate in order to have any chance of accumulating sufficient retirement assets.<\/p>\n

How can an employer help \u201cremind\u201d these employees of their ability to save at higher levels without becoming a financial adviser? By doing their best to continuously engage employees in their retirement plan with Solution #2.<\/p>\n

Solution #2<\/strong>: Hosting an annual retirement plan education session for all employees.<\/strong> This relatively short presentation would include:<\/p>\n