The benefits of automatic enrollment in 401ks are all but a given, and a major reason Richard Thaler, a behavioral economist at the University of Chicago, won last year’s Nobel Prize in economics. But now new research has arrived that could wreck it all.
“Automatic enrollment has pushed millions of people who weren’t previously saving for retirement into 401(k)-style plans,” The Wall Street Journal reported Friday. “But many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.”
The finding is part of a new study from academic economists to be presented Saturday at the American Economic Association’s annual meeting in Philadelphia.
Sure to shake up what many thought were well-established facts within the 401k savings industry, the paper did note that there is a bit of good news.
While auto and mortgage debt increase, “the study finds no evidence that people who are auto-enrolled are running up more credit-card debt than employees who are required to sign up for a 401k on their own. Nor is the extra debt auto-enrolled employees take on causing their credit scores to deteriorate.”
Some of the added debt may even boost participants’ net worth over the long run, the study says, pointing to mortgage debt as an example.
“Our conclusion is that people who are auto-enrolled do eventually take on more debt,” one of the paper’s co-authors, James Choi, a professor of finance at the Yale School of Management, told the Journal. “But they don’t take on more of the kind of debt that would be clearly worrisome,” such as credit-card debt, second mortgages or installment loans, which often charge higher interest rates and are typically used to purchase consumer goods rather than assets.”