The promised solution to America’s retirement crisis may not be much of a solution after all

But new research finds that these changes to retirement savings programs aren’t having the hoped-for effects when implemented in the workplace.

James Choi, a professor at the Yale School of Management, is behind much of the research over the past few decades on auto-enrollment and other cost-saving measures that have led to the widespread adoption of these measures by the public and private sectors alike. Automatic enrollment occurs when an employee must opt ​​out of contributing to a 401(k) or 403(b) retirement plan instead of enrolling; workers must actively choose not to contribute. Once auto-enrolled, contributions are then auto-escalated (another of the popular “giants”), meaning they are increased by a pre-set percentage (usually 1%) each year unless the employee opts out.

Previous research has indicated that removing the effort to sign up or increase contributions leads workers to save more. But now Choi and a team of researchers are back with a look at how workers actually respond to the prompts put in place by their companies.

In a new paper titled Smaller than I thought? The effect of automatic savings policies, Choi and his colleagues write that automatic enrollment and default automatic escalation are less effective at increasing employees’ retirement savings than previously found. Studying nine workplace 401(k) plans, researchers found that auto-enrollment increases net contributions by 0.6% of income per year and self-escalation by just 0.3% of income per year. Only 40% of workers with an automatic default escalation actually increase their savings rate on the first escalation date, and over time, more and more drop out.

The smaller effect is not necessarily due to auto-record itself being a bad tool. But in the US, employees change jobs so often that nudges simply don’t get the time they need to really make a difference. Cash leakage—employees cashing out their accounts when they leave a job instead of rolling money into a new plan—and vesting requirements also dampen the effects, they find. However, employees who stay with one company for a longer period of time see the benefits of these indentations.

“The exact size will differ, of course, as we move between populations,” says Choi wealth. “But what’s pretty general is that we know a lot of that money is withdrawn when people leave their jobs.”

In terms of automatic escalation, far more employees who stay with the same firm opt out of the policy than researchers previously thought would do so. And when others leave one job, they either don’t increase their contribution rate to the next, or start over at a lower baseline, canceling benefits.

Choi says it all makes sense. When workers are struggling to pay the bills — as many are now due to a higher cost of living — one of the first things they tend to cut is their savings rate.

“I don’t think auto policies and savings plans are bad. I think I’m still going through the cost-benefit analysis; they have a significant effect,” says Choi. “But they don’t have as much of an effect as we originally thought because they get canceled out on some of those margins.”

A step backwards for the progress of economies

It’s an unexpected development for policies that have been embraced by financial experts and politicians as easy ways to help fix America’s retirement savings crisis.

In fact, 10 states require employers that don’t offer a 401(k) plan to automatically enroll employees in an individual retirement account, or IRA, according to the report. More recently, President Joe Biden signed the SECURE 2.0 Act into law, which requires most newly established 401(k) retirement savings plans to automatically enroll new employees and automatically increase their contribution rate by default, among other provisions.

None of this is to say that auto-enrolment and escalation policies don’t have a place in the pension saver’s toolkit. Choi says more research is needed, given that this new research only looks at nine different jobs, when there are hundreds of thousands of others. And other research has indicated that the same policies have, by and large, helped younger generations save more than older ones at a younger age.

But other changes could be more significant, Choi says. For example, instead of increasing the percentage of income contributed each year someone works at a particular firm, Choi suggests that the employer should base the default contribution rate on each employee’s age or salary.

A more dramatic change, he says, would be mandatory savings or mandatory contributions to a 401(k) or IRA that can’t be tapped before retirement. Of course, this would be an uphill battle to establish in the US, where individual choice reigns supreme (that being said, the current Social Security system is a form of mandatory saving).

“Are we headed for savings nirvana? Apparently not. We will get a modest increase in the savings rate,” says Choi. “They’re still great, just not as great as I thought they would be.”

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