The growing trend in retirement plans is toward the automatic. Auto-enrollment. Auto-escalation. Auto-rebalance. QDIAs. The benefits of these features are well documented. Studies like this one (here) show how automatic features seem to better prepare employees to replace their normal working wages than plans without these features.
But is there a trade off? Are we breeding apathy into these plans and using the apathy as the rationale for implementing these features?
Studies like one from the EBRI referenced above show that under their calculations, the employees will have better balances at retirement than those under plans without automatic features. For a moment, let’s assume that the other assumptions in those studies do not categorically disqualify them. But let’s look at the aspects that the study does not cover.
First,there is an assumption that participants will either stay in one job or maintain their accounts without cashing them in when changing jobs or take loans. In reality, we know that this happens. And it happens a lot. So much so that the Government Accountability Office mentions it in at least two separate studies (here and here). Cashing out costs employees in current taxes as well as retirement security.
Conversely, not rolling the balance to a new employer costs employers who pay recordkeepers and TPAs a per participant charge. Or it can cost the participant if those charges are passed along to the employee. There are provisions to roll smaller balances out of plans automatically, either to an IRA or a complete cash out. But are those provisions putting employees in a position to be better off in retirement than just staying in the plan? Depending on several variables, the participant may have lower expenses by staying in the plan.
Second, let’s assume that the participant gets to retirement with a bolstered balance due to automatic enrollment. I would suggest that participants who have not been properly engaged throughout the process (saving for retirement) are not appropriately trained to handle the control of such a large amount of money. While having lunch several years ago, I struck up a conversation with the man sitting next to me. Inevitably, the subject of work came up. After learning what I did, he shared with me what he had done with his retirement funds.
“I worked my whole life; I worked hard. And I did a good job saving. I retired with $150,000 in my 401k. So you know what I did? I treated myself to a new Cadillac.”
To be fair, I have no idea what other assets the man had. But it is conversations like this that leads the government to allow annuity features in retirement plans. And it causes others to wax nostalgic about how great pensions were. The reality is that people who have not been properly educated about financial matters who suddenly have access to a large pool of money tend to make bad decisions. Don’t believe me? A majority of people who win the lottery lose most of their new wealth within several years. And the same is true for professional athletes.
So the question becomes: Are we doing an unintended disservice to the participants in plans by removing steps of the process from their control? We know that financial education is not being taught in most schools. And we know that there are blind spots in participants understanding of finance. At least the old enrollment process gave us a chance to speak with the participants about how different asset classes and dollar cost averaging works. It gave them a chance to ask questions about financial subjects. If we are going to continue to automate other features of the plan, maybe some other activities could take their place. Should we be mandating that, in lieu of the standard enrollment meeting, there be some sort of financial education component? Should we redefine the educational component of 404(c) to make participants more financially savvy? As financial services professionals, what else can we do to help prepare participants for retirement?