Auto Enrollment: More Savings, and More Debt? We know that automatic enrollment helps significantly boost retirement savings. What might come as a surprise, though, is that it may also cause workers to take on more of certain types of debt.
The Wall Street Journal reported on a study from a group of academic economists known for their work on retirement savings plans, which found that workers who were auto-enrolled in employer retirement plans offset their savings by taking on more auto and mortgage debt than they otherwise would have.
The silver lining is that auto-enrollees did not take on any more credit card debt than their counterparts who are required to sign up for the plan on their own. Moreover, the additional debt was not detrimental to their credit scores.
From the Wall Street Journal: “The study looked at the savings and debt levels of 32,073 civilian employees the U.S. Army hired in the 12 months before Aug. 1, 2010, when the federal government adopted automatic enrollment in its $537 billion Thrift Savings Plan. (While not technically a 401(k) plan, the TSP operates in a similar way.)”
The study found that four-year post-hire, the employees who were auto-enrolled had accumulated an average of $3,237 more in 401(k) contributions than those who were left to their own devices and had to sign up on their own. The Wall Street Journal article notes that figure includes employee and employer contributions, but not investment growth.
However, the auto-enrollees also amassed an average of $1,563 more in consumer and auto debt, and including mortgage debt, owed an average of $4,131 more on their homes than those who were hired before auto-enrollment was implemented in the plan.
Clearly, that debt offsets the extra $3,237 contributed by auto-enrollees, including the employer match.
Sentiment on these results was mixed. Some experts quoted in the Wall Street Journal said they believed that auto-enrollment isn’t as much of a retirement savings panacea as we thought. Others said, thanks to auto-enrolment, people have more saved for retirement and larger homes, and that higher mortgages aren’t necessarily a bad thing because they contribute to increasing an individual’s overall net worth.
One possible reason auto-enrolled participants take on more mortgage and auto debt is because they may be borrowing from their 401(k)s to finance larger down payments, which helps them qualify for bigger loans (although the researchers weren’t able to obtain data to support this theory), the Wall Street Journal article noted. In addition, having more in retirement savings may create a false “wealth effect,” perhaps making people feel more confident in their ability to afford a larger home.
While it’s discouraging to see that auto-enrolled participants are also taking on more of certain types of debt, ostensibly offsetting their retirement savings, net-net it’s still a positive because they are saving for their future rather than doing nothing. Here is where financial wellness and well-rounded education and communication programs can make an impact by helping employees understand that, even though they are saving for their future, and that’s a good thing, taking on more debt or borrowing from their workplace retirement account is not a wise solution. Teaching them concepts like budgeting and saving up for large purchases may help them make smarter financial decisions and protect their retirement nest egg.
One thing is for sure: auto-enrollment is good for improving retirement savings behaviors. Now, we need to work on changing other not-so-stellar financial behaviors, like taking on debt, for the better.
