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

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

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

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

The quick interpretation of these figures is that, while employees in auto-enrollment plans may, in general, be better off, those who participate in plans without auto-enrollment may have a better savings strategy. In other words, although auto-enrollment brings more people into the plan, higher matching incentives lead to greater savings rates among participants in plans without auto-enrollment.

Which brings us to the bottom-line: It's the savings strategy that matters, not just the simple act of saving. Auto-enrollment succeeds because it removes decision paralysis from the equation. It does this by creating a new inertia. In auto-enrollment, no decision means doing the right thing (i.e., saving for retirement).

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

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

Make sure your savings strategy isn't a turkey.

Instant Insights /

This Thanksgiving, ask yourself: Is my retirement strategy a turkey?

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