In November, the U.S. Department of Labor proposed new rules that states have been awaiting, to move forward in adopting mandatory state-sponsored retirement plans for private businesses.

The rules will create a safe harbor from ERISA fiduciary requirements for complying plans.

They also will open floodgates for these plans to launch, starting as soon as next year.

California, Illinois and Oregon already have enacted enabling legislation. In California, employers with as few as five employees will face a mandate to offer automatic-enrollment retirement plans to all eligible workers, unless they already offer another type of plan.

The template for state-sponsored automatic-enrollment plans was designed by the Brookings Institute, and you can read Brookings’ backgrounder here.

The financial services industry is concerned that this initiative will promote low-cost, low-service plans that inhibit participants’ access to financial advice.

But there’s another potential problem with the template that employers should understand.

It argues that when participants do nothing and make no decisions (i.e., accept default choices), they may be better off than when they seek advice and actively take charge of their own planning, mainly because they are tuning out negative emotions.

For example: In a report supporting the template, Oregon’s task force quoted University of Oregon professor William T. Harbaugh, a neuro-economist, who suggested: “Make the default option to save, so the limbic system has a higher hurdle to overcome…Start with small savings, increase them automatically. People aren’t sacrificing when they make the decisions, tricks the limbic system...Make decisions simple. Confusion overwhelms the frontal cortex…Make people commit. The limbic system is just waiting for its chance to spend money now.”

The limbic system is the part of the brain that controls emotions.

In other words, don’t encourage participants to make decisions. Rather, let them auto-enroll and trick their limbic systems! Make retirement planning so simple that plan participants don’t need to tax the frontal cortex, where humans do hard thinking.

But if retirement plans should be so mindless, why does the DOL mandate detailed periodic participant disclosures regarding plan costs and investment choices?

When neuro-economists start winning the argument, you know the hype about auto-enrollment is getting absurd.

Let small employers in your market know they have a choice, if they don’t already have a plan.

They can procrastinate and be forced to offer a cookie-cutter state-sponsored auto-enroll plan. Or they can take the initiative now to evaluate alternatives such as SIMPLEs, SEPs and payroll deduction IRAs, with professional advice attached.

By doing so, they can preempt state-sponsored mandates which now seem sure to come.

They also will force their employees to actually think about retirement.

Instant Insights /

Help small employers assess retirement plan auto-enrollment

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