You may have heard about the movement to automatically opt employees into their 401K’s. Right now, the default option is for you not to contribute. When you’re hired they ask you if you’d like to contribute and how much. If you say no, then nothing is taken out of your check. There is a movement afoot to make opting in the default option instead. When you’re hired you would automatically have three percent (more or less depending on the employer’s plan) deducted from your check and placed into a retirement plan/fund of your employer’s choosing. You would have to specifically tell your employer not to do this in order not to contribute to the plan.
The thinking is that if the default option is to be enrolled in the plan then more people will save because, frankly, we’re all too lazy to be bothered with filling out the paperwork to stop the withdrawals. This is partly why more people don’t currently contribute to retirement plans. They’re too lazy or busy to be bothered with filling out the paperwork to join and researching the options for their contributions. So, the thinking goes, if you automatically enroll people into the retirement plan, they will be saving something and probably won’t opt to change it.
The goal of this plan is to get people to save something for their retirement. The government wants us to save more because retirees with no money will soon overburden Social Security and Medicare. People need to start taking responsibility for their own retirements. Since people have shown time and time again that they won’t contribute voluntarily, the government wants to try to sneak it up on us.
I don’t disagree with the plan. I wish more people would step up and take care of their own retirement planning. I’m not looking forward to supporting others in my old age. I will have saved enough to take care of myself, but I will likely be penalized in higher taxes and reduced Social Security payments to take care of those who did not take responsibility. However, I wonder if the plan will really help all that much.
Sure, it’s great that people will be saving something. And they probably won’t really miss the money because three percent taken out of your paycheck before taxes really isn’t that much. If your gross pay is $2000 every two weeks, for example, then three percent of that is only $60, or $10 per month. That shouldn’t present a problem for most people. And therein lies the problem. The contributions that will be automatically deducted are not nearly enough to create a secure retirement on their own. Obviously the idea is that the employee will opt to contribute even more or to open some other retirement account like a Roth IRA on their own. Yet if people won’t even voluntarily sign up for retirement plans, what makes anyone think they will voluntarily opt to have even more deducted from their checks? I think the odds of most people exceeding the default deduction are pretty slim.
The other goal of this plan is to teach people to save. The idea is that if you show people savings in action they will be inspired to save more. If you show them how a 401K adds up they will want to do more. I don’t think this will work, either. Most people know how saving works. You don’t need much more than an elementary school education to understand interest and compounding. When you start a job you are usually given information on the retirement plan that includes all kinds of charts showing how your contributions add up. People ooh and ahh over those charts during orientation, but still don’t sign up. For all that they understand, people still don’t want to save. You can’t force people to save money. Sure, you can take a nominal amount of their check but you can’t make a non-saver get excited about doing more. Sadly, many people only learn how to save once the crisis comes. Forcing people into a 401K isn’t going to turn them into savers or teach them how to save for the long term.
I worry that these plans will have the opposite effect. Instead of getting people to save more, I worry that this default contribution scheme will increase complacency amongst people and actually lower their desire to save. People will start to think, “I’m saving for retirement through my employer. I don’t have to do more.” They’ll lose any desire they may have had to save more because they will assume it’s being taken care of by those default deductions. Even if you explain that they need to do more, many will assume that what is being done is enough. If people are so complacent when they aren’t saving at all that they think retirement will magically take care of itself, why would anyone think that they would not become even more complacent and guilty of magical thinking once a little money is actually being put away?
When people who’ve been “tricked” into these contributions retire they will have some money saved and that is better than nothing, but it won’t be nearly enough to accomplish the governments’ goal of reducing the burden on entitlement programs. It won’t be enough to make them independent in retirement. I don’t think many of them will have learned to save on their own. I’m afraid that this plan might actually make the saving situation worse in this country. People will assume that it’s taken care of and not bother to save more, to learn about investing, or to take responsibility for their own situation. If they won’t do it when no contributions are being made, why would they do it once some contributions are being made by default? So what do you think? Will automatic contributions help or hurt the long term retirement prospects in this country?
“The government wants us to save more because retirees with no money will soon overburden Social Security and Medicare.”—One does not get more from Social Security or Medicare by having no money.
To Joan: Your statement is accurate, but I think what Jennifer is saying is that she anticipates a time in the future when those of us who have saved will be “penalized” by the government. If we show a certain amount of wealth, the government will likely opt out of giving us our social security benefits, saying we have a sufficient amount for our basic needs and therefore our money is best given to others who were more frivolous.
That is exactly what the intent of social security was in the beginning. It was sold to the taxpayers as a way to ‘force’ people to save for retirement. But when the politicians saw all of that money, they just moved the cash into the general fund where they could use it to pay for pork projects instead of investing it as was intended.
They originally had an opt out for Social Security. That was abolished when they saw how much money they could get from us. Now Social Security ‘contributions’ are just another tax that you must pay.
If they do make 401k contributions automatic, it won’t be long before they become mandatory and the banks and investment houses will add more fees turning them into an even bigger cash cow for them. Then the forced ‘contributions’ will penalize those who actually want to invest in something besides a low performing required company 401k for their retirement.
I contributed to company 401k plans for years only to have most of my retirement wiped out by poor planning on the part of the professional fund managers. My calculations show I would have saved just about as much with a mattress fund.
Read the most recent report on saving from Vanguard – released only a week or so ago. It confirms that automatic provisions, done right, include automatic enrollment, automatic escalation, age-appropriate investment defaults – applied to all participants, not just to new hires. The results:
(1) Dramatic increases in participation from a national average in the low 70’s to the 90’s, or almost 30% higher.
(2) Over time, significant increases in the contribution rate.
Yes, to the extent that the goverment changes social security and Medicare into means-tested programs, people who financially prepared for retirement will be “penalized” – they will have paid their taxes and because they also saved, they will either pay higher Part B and Part D premiums, or higher taxes on social security benefits, both or more, etc. This would be in addition to the existing formula and bend points – that is, the only thing more regressive to income compared to the taxes, are the social security and medicare benefits themselves.
But, that said, I would also note people are likely to tread carefully here. Because, once you limit the benefits so that they only favor a minority of Americans, those who reach old age after failing to prepare for retirement, you may very well lose the now 75 years of broad based support to tax all working Americans to provide for all who survive into old age.
For a comparison, think of “ending welfare as we know it” where a Democratic administration put limits on just how far we would tax Americans to provide benefits. Remember, there are some who actually want to expand social security and medicare for those who failed to prepare for retirement – deeming existing benefits inadequate. However, should benefits be raised for those who failed to prepare by making the programs means tested for those who did prepare, I can see the day when a future generation responds with action to limit, not to expand, the “social” in social security.
Another problem with Auto enrollment is will these participants keep this money in a retirement plan if they change jobs (or loose their job) I believe that most people who won’t take the first steps to think about their own retirement savings are unlikely to do anything but take a lump sum at the end of their employment. So Auto enrollment is a small nudge, to hopefully get them to think about retirement, but with out the backing of a good education campaign, won’t help most people.
I’m still in favor of Auto enrollment.
I could have sworn that 3% of $2000 every two weeks works out to be slightly over (on average) $120/mo., not $10/mo. as the article states… then again, it is Monday morning, so perhaps I missed something.
I have about 65 people in my group at work. I have been pushing my employer to automatically enroll new hires into our 401k. We match 50% up to 4% and then “gift” every participant another 2%. You can contribute up to about $15,000 a year. It kills me to see some young people lamenting that they cannot afford to contribute. How can they afford NOT to? These folks make from $30k to $100k. Every one of them could afford at least 6%.
Do the math. If you contribute just 6% now and increase to 12% by age 65, and your employer gives you another 3% and the market gains (ON AVERAGE; not the last two years) 8%, you would have quite the nest egg after 40 years of working and contributing.
At just $25k annual income, starting at age 25, if you contribute just $28 a week (6%) and your employer gives you 3%, at annual return of roughly 8%, you’d have close to a quarter million dollars at age 65. At 6% annual return you could then withdraw $1,000 a month without affecting your principal.
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i think that HR’s should have a good grasp on explaining 401K’s to their employees and make sure they understand the context. if education is lacking that’s where it hurts the individual – then they wouldn’t feel “tricked” as you say, or be complacent if they know what they should be doing with their money. i think that it’s a good idea to auto enroll ESPECIALLY if your employer matches your contribution, given they also provide proper education at the time of enrollment.