It's been 10 years since we saw a rare convergence of theindustry, regulations, and academics with the signing of thePension Protection Act (PPA) in 2016. Among the gems included inthis legislation is the encouragement of the use of auto-enrollment. This “nudge” concept,advocated in part by strong academic studies, shifts the defaultfrom opting-in to opting-out. This takes advantage of the nativedecision-making inertia all too often exhibited by humans — thatis, not making a decision.

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The fruits of this reframing have been borne out by increasedparticipation rates. According to the U.S. Bureau of LaborStatistics, significantly more employees participate in 401(k)plans with auto-enrollment versus those that participate in401(k) plans without auto-enrollment. Thisoutcome matches the intention of the 2016 PPA.

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Perhaps “matches” wasn't the best word to use. Theorists fearedauto-enrollment would remove the need for companies to offer amatching incentive to employees. Indeed, based on the mean data,this appears to be the case. The mean maximum match of 3.5 percentfor plans without auto-enrollment is nearly 10 percent higher thanthe mean maximum match for plans without auto-enrollment.

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By itself, this fact is merely trivia. The important thing,though, is the reaction of employees. It turns out matchingincentives work. A larger percentage of employees max out on theircompany matching in 401(k) plans without auto-enrollment than do inplans with auto-enrollment.

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The quick interpretation of these figures is that, whileemployees in auto-enrollment plans may, in general, be better off,those who participate in plans without auto-enrollment may have abetter savings strategy. In other words, although auto-enrollmentbrings more people into the plan, higher matching incentives leadto greater savings rates among participants in plans withoutauto-enrollment.

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Which brings us to the bottom-line: It's the savings strategythat matters, not just the simple act of saving. Auto-enrollmentsucceeds because it removes decision paralysis from the equation.It does this by creating a new inertia. In auto-enrollment, nodecision means doing the right thing (i.e., saving forretirement).

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Here's the problem: This new inertia of default investing has adownside. Because it removes the need to make decisions, it alsoremoves the necessary deliberation required when making decisions.Employees are too tempted to leave everything on autopilot. That'sfine when you're midflight and the course is already set; itbecomes an issue when unanticipated winds cause you to veer offcourse—and let's not even talk about takeoff and landing.

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Getting started in a 401(k) is not a strategic decision, but itis a critical first step. Auto-enrollment has proven to be aneffective nudge for this. Beyond that first step, employees need asavings strategy, even when auto-escalation is used. That decisioncannot be delegated or nudged.

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Make sure your savings strategy isn't a turkey.

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