While the virtues of auto-enrollment for defined contribution (DC) and other aspects of the Ideal Plan are being extolled by industry experts with 52% of plan sponsors using it, there are costs and not just for the employer. Research unveiled at a recent industry academic forum by Harvard professors shows that some consumers may be incurring debt to participate in their employer’s 401k or 403b plan.
Harvard Business School professor John Beshears studied the behaviors of US Army civilian employees and found that debt was used to offset contributions by 37% of participants. Though the employees benefited due to a generous match by the employer, the concerns are nonetheless real. Not mentioned was whether the tax advantages of DC plan contributions had any effect.
Though a small universe, the research shows that one size does not fit all for employees saving for retirement at work. And while one might think that lower income workers are most affected, many who might be better off investing in risk mitigation insurance products, mid-level workers also suffer from consumer debt. Some experts believe that investing in an HSA is a better deal for many consumers with its triple tax benefit.
So while the match offset the cost of incurring debt for participating employees in the research by the HBS professor, it is also the reason that plan sponsors are reluctant to institute auto-enrollment. More employees participating in the plan means a higher match. Some plan sponsors are considering the stretch match where, rather than matching 100% of the first 3%, which was part of the formula for US Army civilian employees, companies match 25% of the first 12%. The costs are lower for employers but so are the benefits for savers.
Instituting auto-features like auto-enrollment is generally a good idea for most companies and most employees but one size does not fit all leaving room for financial wellness and participant engagement to integrate these features into a holistic financial plan.
