Judging by the results of a J. P. Morgan Asset Management survey, the retirement industry needs a new education campaign, this time aimed at some defined contribution plan sponsors.
The survey showed that 45% of plan sponsors still do not offer auto enrollment, and 62% do not offer automatic contribution escalation, even though both features have been shown to increase participation rates and saving levels. These sponsors need a nudge to do the right thing for their employees.
The plan sponsors reluctant to adopt automatic features in their defined contribution plans believe participants should make their own decisions regarding whether or not to participate, how much to contribute and how to invest.
These employers should be educated on the positive effects of auto enrollment — higher participation in the retirement savings plan. Automatic plan features do not have to rob employees of their autonomy and do not force them to participate.
Most companies with auto enrollment have opt-out provisions. If an employee does not wish to participate in a company's defined contribution plan, he or she can opt out. Likewise, he or she can opt out of automatically increasing contribution rates.
But auto enrollment makes use of inertia to increase participation and retirement saving by requiring an employee to affirmatively opt out of participation in the plan, rather than requiring them to take an action to opt in.
As a result, many employees who otherwise would not sign up for the retirement plan are enrolled, increasing the chance that employees will not have to depend only on Social Security in retirement.
As University of Chicago economist Richard Thaler and legal scholar Cass Sunstein have written, many people need a nudge in the right direction when it comes to managing their financial affairs. Auto enrollment and auto escalation in defined contribution plans provide that nudge.
