The promised fix to America’s retirement crisis might not be much of a solution after all

But new research finds that these changes to retirement savings programs don’t have the expected effect when implemented in the workplace.

James Choi, a professor at the Yale School of Management Much of the research Over the past few decades, automatic registration and Other savings incentives This has led to widespread adoption of these measures in both the public and private sectors. Auto-enrollment occurs when employees are required to opt out of contributing to a 401(k) or 403(b) retirement plan rather than opting in; that is, they must actively choose not to contribute. When auto-enrolled, contributions are automatically increased (another common “nudge”); that is, contributions increase by a predetermined percentage each year (usually 1%) unless the employee opts out.

Previous Research suggests Relieving workers of the hassle of having to join or increase their contributions has been shown to help them save more, but now Choi and her team are looking again at how workers actually respond to nudges put in place by their employers.

“Is the effect of automatic savings policies smaller than you thought?Choi and his colleagues write that automatic enrollment and default automatic increases are not as effective at boosting employees’ retirement savings as previous findings suggest. After studying nine workplace 401(k) plans, the researchers found that automatic enrollment increased net contributions by 0.6% of annual income, while automatic increases increased net contributions by only 0.3% of annual income. Among workers with automatic increases as the default, only 40% actually increased their savings rate on the first day of the increase, and more workers are dropping out over time.

The weaker effect isn’t necessarily because auto-enrollment is a bad tool in itself, but because U.S. employees change jobs so frequently that it doesn’t allow the nudge the time it needs to really take effect. Cash leakage (when employees withdraw cash from their accounts when they leave and don’t transfer it to a new plan) and vesting requirements also weaken the effect, the researchers say. But employees who stay with one company for a long time see the benefits of such nudges.

“Obviously the exact magnitude will vary as you move through demographics,” Choi said. luck“But the general consensus is that as people leave work, a lot of this money gets withdrawn.”

As for the automatic increases, more employees who stay with their companies opt out of them than researchers previously thought, and others who leave see their benefits wiped out when they leave because they don’t increase their contribution rates or start over at a lower base rate at their next job.

Choi says this all makes sense: With many workers struggling to pay their bills right now due to the rising cost of living, one of the first things they tend to cut is their savings rate.

“I don’t think auto insurance or savings plans are bad. I think they pass the cost-benefit analysis and have a big impact,” Choi said, “but they’re not as big an impact as we originally thought because some of the margins are being eliminated.”

Savings progress reversed

This is an unexpected development for a policy that has been supported thus far. Financial Expert and Politicians use the easy way Assist Solving America’s Retirement Savings Crisis.

In fact, 10 states require employers that don’t offer 401(k) plans to automatically enroll employees in individual retirement accounts (IRAs), according to the report. Recently, President Joe Biden signed the SECURE Act 2.0 into law, which requires most newly established 401(k) retirement savings plans to automatically enroll new employees and automatically increase contribution rates by default.

That’s not to say that auto-enrollment and boost programs aren’t useful parts of a retirement savings toolkit. Choi said the new study only looked at nine different workplaces, among hundreds of thousands of others, and more research is needed. And other studies have shown that these same programs broadly help younger generations save more at younger ages than older generations.

But other changes might make more sense, Choi said. For example, rather than requiring employees at a particular company to contribute a larger percentage of their income each year, he suggested that employers should set default contribution rates based on each employee’s age and salary.

The more dramatic change is Forced Savingsor mandate contributions to 401(k) or IRA-type accounts that cannot be changed before retirement. Of course, this would be a difficult task to establish in the United States, where individual choice is paramount (although the current Social Security system is a form of forced savings).

“Are we going to move ourselves closer to savings heaven? Not likely. Savings rates are going to rise modestly,” Choi said. “Savings rates are still high, but not as high as we thought they would be.”

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