Stay Informed!

Innovator Towarnicky Points Out Flaws in WSJ Article

By Anne Li on 07/21/2011 @ 03:30 PM

Tags: Economic Inclusion, Financial Empowerment, Innovation, Innovators

Here is a timely and hard-hitting post from CFED’s Innovative Idea Champion Jack Towarnicky, prompted by a recent front-page Wall Street Journal article. You may also want to read Jack’s Executive Summary, The 401(k) as a Lifetime Financial Instrument, available through his Innovator Profile Page. Here are Jack's thoughts:

It was discouraging to see a front-page Wall Street Journal article on July 7th that was only the most recent of many articles critical of benefit plans: "401(k) Law Suppresses Saving for Retirement." The WSJ is America’s #1 daily newspaper - reaching 2.11 million Americans. The article focused almost entirely on some workers, perhaps as many as 40% of those automatically enrolled, who say they would have contributed more under a 401(k) savings plan with a voluntary (instead of automatic) enrollment process. Did you get a call from the Vice President of Human Resources or maybe the Chief Financial Officer of your organization?

Here’s my take on the article.

Consider a recent study from Vanguard, the huge investment management company, "How America Saves, 2011.” On page 25, see figure 23 – for those with less than one year’s service, only 29% voluntarily enroll versus 75% with automatic enrollment. So, a year’s tradeoff between voluntary and automatic enrollment 401(k) plans might be estimated as:

• 12% (40% of the 29% who would have enrolled) who say they would have contributed more
• 17% (the rest of 29%) would would have contributed 3% or less anyway, compared to
• Another 46% (for a total 75%) who are enrolled only because of the automatic features, while
• All 75% are “teed up” for automatic escalation.

Importantly, that same Vanguard exhibit confirms that participation is also dramatically higher for lower income and younger Americans:

• Income < $30,000: 26% voluntarily enroll, 76% accept automatic enrollment
• Age < 25: 18% voluntarily enroll, 72% accept automatic enrollment

The importance of early money, in terms of building financial security, cannot be overstated!

Automatic features have been around for over 15 years. The article’s lead paragraph incorrectly attributes automatic features as originating in that 2006 Act. The WSJ article's author also ignores the rest of the Pension Protection Act of 2006 provisions for 401(k) plans and other retirement plans, to solely focus on this one group who SAY they intended to save more. Why didn’t she take the time to confirm that EACH and EVERY worker who allowed the default to take effect was specifically notified of their opportunity to enroll? Why didn’t she mention those who did take action to voluntarily enroll - those who rejected the default for a different rate, those who selected Roth 401(k) or those who rejected the Qualified Default Investment Alternative?

But, okay, let's focus on those who SAY they woulda, coulda, shoulda saved more with a plan that uses voluntary enrollment. The workers’ failure to respond when solicited is not a surprise - it is sadly typical. Many studies confirm workers state an intention to start saving or to increase contributions but fail to follow through. My favorite is a 2001 Harvard study, “Saving for Retirement on the Path of Least Resistance” (updated December 2005). There, on pages 6 and 7, the study confirms that for every 100 workers, 67.7% report that their current savings rate is "too low" relative to their ideal savings rate, 35% of those who said their savings rate is "too low" confirmed an intention to increase contributions, most within the next two months; however, only 14% actually increased contributions in the four month after the survey. Why didn't the WSJ reporter identify those workers who did take action post-enrollment to raise their contribution rate? Best intentions are just that - intentions.

Finally, the use of average savings rates among participants is misleading; citing a decline among AonHewitt-administered plans from 7.9% (2006) to 7.3% (2009). However, the 2006 and 2009 populations are very different – by 2009, many joined at a 3% rate specifically due to the increased prevalence of automatic enrollment.

For comparison, in a May 2011 release, AonHewitt published a study of 120 large employer 401(k) plans it manages:

• Participation increased to 75.8% in 2010 from 67.2% in 2005
• Plans with automatic features increased to about 60% in 2010, from 24% in 2006

So, because the WSJ article selectively presented only the change in contribution rates among those who were contributing, recent entrants at, say 3%, depressed the average. A more accurate measure of how automatic features change savings behavior would have been a comparison of the average deferral percentage -- because a variable that includes the non-participant zeroes is much more representative.

To conclude, yes, certainly the features in your automatic enrollment design do make a big, big difference. But, a plan sponsor using automatic features, done right (enroll all workers, escalate all workers, and apply those automatic features perennially), will address each of the top three financial security/retirement preparation issues Americans face – most employers don’t offer a retirement savings plan, not enough employees save, and those who do save, often don’t save enough.

What say you?

The comments here are solely mine and do not necessarily reflect the views of any employer, trade group or association I am affiliated with - past present or future.

Here are links to comments concerning the Wall Street Journal from two other benefits experts:

• Jack VanDerhei - Employee Benefits Research Institute
  VanDerhei writes, in part, “The WSJ article reported only the most pessimistic set of assumptions from EBRI research…[It] also chose not to report any of the positive impacts of auto-enrollment…What it failed to mention is that it’s increasing savings for many more – especially the lowest-income 401(k) participants.”
• David Wray - Profit Sharing Council of America