Thursday, June 27, 2013

Auto-Enrollment Critics Miss a Major Point

These days it’s pretty common to hear or read a financial writer, academic, or policy wonk, criticize defined contribution retirement plans.  Service provider revenue sharing arrangements, investment fees and performance, participant inexpertise, tax cost, or what-have-you, have all become grist for the critic’s mill.  One of the more suspect criticisms is the charge that automatic enrollment 401(k)-type plans—also known as automatic contribution arrangements, or ACAs—are lowering contribution rates in employer-sponsored retirement plans.  This is the premise of an article in the Wall Street Journal in May of this year, repeating a charge that appeared in the same publication in 2011.  That 2011 article was the most brazen, and was entitled “401(k) Law Suppresses Saving for Retirement,” claiming that the Pension Protection Act (PPA) “is actually reducing savings for some people.”
To take a script page from the late radio personality Paul Harvey, there is a “rest of the story” that deserves equal time.  The most important objective of those who have been supporters of automatic enrollment is to bring more employees into retirement plans, even if only in a modest way.  The logic is that once they have become participants, and see their retirement account balances growing, they will remain in the plan, hopefully becoming more informed, perhaps even more aggressive savers. 
Automatic enrollment detractors cite the fact that average deferral percentages for U.S. retirement plan participants have in some cases declined from pre-auto-enrollment days.  Many plans that have implemented automatic enrollment have set the initial deferral rate at 3% of compensation.  Because many existing participants in 401(k)-type plans defer at levels higher than 3%, an influx of many new participants deferring at this lower rate must—by the nature of statistics and the law of averages—reduce the overall average.   
This does not mean that everyone is deferring at the lower rate.  What it really means is that more are deferring, and those deferring at a lower rate are dragging the average down somewhat.  Another criticism is that some participants take the path of least resistance and enter the plan via automatic enrollment—at a low deferral rate—when they might otherwise have deferred at higher rates if they had entered the plan by making an affirmative election.  And, inertia being what it is, some may not revisit the issue and take advantage of the opportunity to increase their deferral rates.    The “cure” for this, if a cure is needed, may be for plans to consider setting their initial automatic enrollment rates higher than 3% or to implement automatic deferral increases that occur after the initial deferral period. 
Critics need to realize that new concepts take time to reach their potential, to work out initial kinks, and eventually reach the optimum.  Thomas Edison is reported to have said about his inventive endeavors: “I haven’t failed.  I’ve found 10,000 ways that don’t work.”  PPA, it must be remembered, was enacted in 2006, its provisions mostly taking effect for 2007 and later years.  It will take time to reach the optimum.
Some members of Congress seem to see this, and have proposed tweaks to the Internal Revenue Code to help automatic enrollment reach its potential.  For example, Rep. Richard Neal’s Retirement Plan Simplification and Enhancement Act of 2013 (H.R. 2117) has provisions that would encourage setting initial automatic enrollment rates at higher levels.  New plan testing exemptions, and a special tax credit, would be available for plans that set initial automatic enrollment deferral rates at 6%, and raise them—subject to employee opt-out, of course—in following years.
Without bashing the media, it sometimes seems like publications and their reporters are looking for the sensational headline, the calamity, the failure, or the threatening, as a means to capture reader or viewer attention.  With something as important as Americans’ retirement security, thoughtful reporting rather than sensationalism needs to rule the printed page and the broadcasting airwaves.