Dispiriting news. While automatic enrollment certainly helps boost retirement plan participation and contributions, its ultimate impact on overall plan balances is unclear.
A new research report from the TIAA Institute notes that while automatic enrollment in employer retirement plans has been shown to vastly increase plan participation, many employees tend to withdraw some or all of their account balances before retirement. It’s something TIAA sees as offsetting automatic enrollment’s positive effect.
This study sought to gauge how automatic enrollment influenced savings plan loans and withdrawals at a Fortune 500 financial services firm and how pre-retirement withdrawals affected employees’ retirement plan balances over time.
The finding?
Automatic enrollment increases total potential retirement system balances by 7 percent of starting pay eight years after hire.
Importantly, leakage in the form of outstanding loans and withdrawals not rolled over into another qualified savings plan increase by 3 percent of starting pay after automatic enrollment.
Quick math finds that after accounting for leakage, automatic enrollment increases retirement system balances by between 4 percent and 5 percent of first-year pay eight years after hire.
And, unfortunately, as tenure increases among those who remain employed, leakage offsets a bigger portion of automatic enrollment’s increase in savings.
The researchers studied retirement savings outcomes over time at an employer that began automatic enrollment at a 2 percent default contribution rate in 2005, comparing results for employees hired in the 12 months after automatic enrollment began to those for employees hired in the 12 months prior.
They looked at savings plan participation, contributions, balances, outstanding loans, and whether withdrawals were rolled over into another qualified plan.
They also projected automatic enrollment’s potential impact on savings absent pre-retirement withdrawals.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
