You know Your Survival Guy is the first one to say that you should save until it hurts. You should save as much as you can for as long as you can and then save a bit more.
But, does that mean you should be forced to?
A growing cohort in Congress wants to do just that. They want to automatically enroll you in your employer’s 401(k) plan.
This isn’t actually a new plan. It goes back to Obama-era regulatory “czar,” Cass Sunstein, who wrote the book Nudge. His philosophy was to take as many decisions away from people as possible, and let the government make the decisions for them. Does that sound like freedom to you?
The planned government mandate is an effort to get Americans to save more for retirement. If only there were a government program that promised to help you save money for retirement…. Oh right, there is, it’s Social Security. The government has already been “nudging” Americans to pay into Social Security since the 1930s. That fund is projected to fail in 2035.
Alessandra Malito reports on the 401(k) plan in MarketWatch:
Only half of Americans participate in a workplace retirement plan, a staggering statistic considering how much of the responsibility for funding an adequate retirement now falls on individuals.
The problem: Without the financial education, encouragement or access, retirement savings isn’t always a top priority. Americans have so many other financial obligations to juggle as it is — such as rising costs of college and housing, or shorter-term goals like buying a home or starting a business, and trying to provide for their families. Instead of planning for their future financial stability, many are trying to stay afloat in the present.
That’s where automatic enrollment comes in: it’s one way to get Americans to stash money into a retirement account without thinking about it. With auto-enrollment, companies can sign up their new employees into their retirement savings programs, beginning with deferring a small percentage of their salaries, so that at the end of their careers their workers will have some sort of a nest egg waiting. Congress members have included this key provision in the Secure Act 2.0, the latest legislative proposal aimed at fixing retirement security for all Americans.
“It would require employers to auto-enroll workers into the plan so that workers wouldn’t be deterred by inertia,” said Richard Johnson, director of the program on retirement policy at the Urban Institute. The proposal also addresses auto-escalation, which automatically increases employees’ contributions to their accounts every year. As it stands, the proposal states participants must begin with a deferral of at least 3% and no more than 10%, with an annual increase of one percentage point for every year (up until the maximum 10%). “Requiring all plans to increase the share of contributions into retirement plans would make it much easier to accumulate enough money to live securely.”
This provision also affects 403(b) plans.
Auto-enrollment itself is not a new concept. Richard Thaler, the 2018 economics Nobel Prize winner, has advocated for the expansion of auto-enrollment and auto-escalation in workplace savings accounts in the more than 10 years he’s worked in behavioral economics. It has already proven effective — by automatically placing employees in retirement plans, and in some cases increasing their contribution rates minimally but continually, Americans saw billions of dollars more in their retirement savings. The reason for this success is simple: workers don’t have to think about saving — it’s being done for them.
What is new, however, would be the federal government mandating auto-enrollment. Currently, employers have the option to voluntarily implement this strategy. The trend is on the rise — more than four in 10 employers automatically enrolled new employees into a retirement plan in 2019, and 19% of companies automatically escalated their contributions, according to the Society for Human Resource Management. The increase for these provisions was modest in 2020, but many companies were also treading with unknown circumstances because of the pandemic. Experts expect to see more employers use auto-enrollment in 2021.
Encouraging saving is a good thing. Mandating it is not. Government intruding between employers and employees to mandate how benefits are delivered will probably result in fewer of those benefits being offered. For example, look at the wave of companies that began hiring more part-time employees when Obamacare mandated full-time employees be insured. The NBER estimated that up to a quarter of a million employees lost their jobs between 2014 and 2016 alone thanks to employers dodging Obamacare’s mandates.
Employers only expect so many of their employees to take advantage of 401(k) match savings. If all employees are forced as a wave into the system, employers will have to adjust what they can offer as a match, probably by reducing them. That will leave employees who would have proactively saved more losing out because of lower match rates.
Action Line: If your employer offers a tax-advantaged savings plan and you can use it, you should, especially if there are matching contributions available. If you need help building a savings plan for yourself, I’d love to talk to you.
