The downside of automatic 401(k) enrollment

Good Day All,

I’ve always been an advocate of the Opt-Out 401k concept. When I started my job I couldn’t wait to setup my 401k but I believe at the time I had to wait 30 days before I could do so. For many people, they become quickly accustomed to the take home pay on their check that the shock or thought of it being reduced becomes hard to sallow. So having this automated from the get-go seems like a win-win, right?

Well Kelley Holland of CNBC points out some flaws. First off, the employer has to pick the initial contribution rates, and they are picking very conservative rates. Of course, this would be a very personal choice based on your circumstances, so I can’t blame companies for not wanting to default to 15% for instance. The second part of this problem is that employees aren’t going and changing these rates. In other words by automating the process people aren’t taking responsibility for their retirement.

One solution that’s in use is automatic increases overtime. But again these rates are fairly conservative and the employee still needs to actively manage their account.   To me one solution would be to put the rate selection front and center during the benefits selection. Of course some basic education in retirement savings would help. This could be put right alongside the insurance selections which always need explanation anyway.

Do you have suggestions to how we could address this issue? Let me know in comments.

–Derek

Source: The downside of automatic 401(k) enrollment

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