401(k) auto-enrollment less effective than expected, study finds

Employers are increasingly putting workers’ 401(k) plan savings on autopilot.

But the positive impact of automatic retirement savings is smaller than originally thought, new research shows.

Previously “understudied” factors — such as workers cashing out 401(k) balances when they leave a job — “significantly reduce” the long-term impact of policies like auto-enrollment and auto-escalation, according to a new article published by National Bureau of Economic Research.

Importantly, some of the paper’s co-authors — James Choi of Yale University and David Laibson and John Beshears of Harvard University — are behavioral economists who pioneered early research on the positive effects of automatic enrollment.

“They’re like the (original) OGs,” said David Blanchett, head of retirement research at PGIM, an investment manager. “These are the people who have been doing research on this for decades now.”

Automatic savings have been a cornerstone of the 401(k) policy since Congress passed the Pension Protection Act of 2006.

Policies like auto-enrollment and auto-escalation are intended to increase the size of employees’ nest eggs by automatically enrolling workers in their company 401(k) and then increasing (or “escalating”) their savings rate over time.

In this way, people’s tendency toward inertia works in their favor.

About two-thirds of 401(k) plans were using automatic enrollment as of 2022, according to survey data from the Plan Sponsor Council of America, a trade group. Of these, 78% used auto-escalation.

Overall, their effect on economies is positive, “not as positive as we previously thought based on the research we did before,” Choi said in an interview.

The group’s original research did not track outcomes for workers who left jobs where they were automatically enrolled.

This research update tried to do a broader analysis, incorporating factors such as job turnover, Choi said.

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Overall, Choi and his coauthors recently found that automatic enrollment increased average 401(k) contribution rates by 0.6 percentage points of income over workers’ careers.

That’s a 72 percent drop in effectiveness from the 2.2 percentage point increase that was extrapolated from “early pioneering work results,” the paper says.

“You’re talking about 1.6 percent of income less saved per year,” Choi said. “If you were to add all that up over a 40-year career, you’re talking about more than half a year of saved income.”

When compound interest on those savings is factored in, it can make a “pretty substantial” financial difference, he added.

The difference is largely a function of so-called “leakage” from 401(k) plans. i.e. early withdrawal of funds before retirement.

About 40 percent of workers who leave a job cash out their 401(k) plans each year, according to the Employee Benefit Research Institute. Such leakage amounted to $92.4 billion in 2015, according to the latest EBRI data.

Workers can withdraw funds from their 401(k) plan before their employer match is fully vested, meaning they would be giving up that free money.

In addition, only 43 percent of workers eventually accepted an automatic increase in savings rates after a year of accepting a higher contribution rate, the National Bureau of Economic Research paper found.

By comparison, early research by behavioral economists such as Richard Thaler and Shlomo Benartzi estimated this share at around 85%.

Changing jobs also complicates auto-escalation in addition to auto-enrollment, said PGIM’s Blanchett.

For example, a worker’s increased contribution rate may reset to a lower savings rate if they were to join a new employer’s 401(k) plan.

While auto-escalation isn’t necessarily a reliable way to get people to save more money, auto-enrollment has proven “very successful,” Blanchett said.

He believes the effectiveness of auto-enrollment should not be judged based on 401(k) leakage, which is a separate issue from politics, he said.

“I think auto-enrollment does a spectacular job of getting people into the plan,” Blanchett said. “But we still have this massive leakage problem. It still exists whether you have automatic registration or not.”

That said, there is room for improvement with the automatic saves.

“I’d like to get to a point where 7 percent or 8 percent is the median default savings rate,” Blanchett said.

When coupled with an employer match, the average worker would save 10 percent or more of their wages, which they should generally strive for, he said.