Auto-enrollment can dramatically increase participation in a retirement plan—however, the degree to which it is beneficial varies depending on which party one considers, says a recent study.
Richard Patterson, an Assistant Professor and Director of Long-Run Research in the Office of Economic and Manpower Analysis at Brigham Young University, and William Skimmyhorn, an Associate Professor of Finance and Economics at the College of William and Mary, examined the effects of policy features on retirement saving. They wrote their paper, “How Do Behavioral Approaches to Increase Savings Compare? Evidence from Multiple Interventions in the U.S. Army,” for the National Bureau of Economic Research (NBER).
Patterson and Skimmyhorn looked at a variety of factors among offices and members of the U.S. military during the period 2016-2018—including informational emails, action steps, target contribution rates, active choice, and automatic enrollment—regarding their effect on participation and on employers.
Employees
The researchers found that the magnitude of the effect various interventions have on participants is heightened by the intensity of the intervention. Patterson and Skimmyhorn found variations among various groups:
| Intervention Means | Most Effective for |
|---|---|
| Light Touch (email, information, action steps, contribution rate targets) | older individuals |
| Active Choice | women, white individuals |
| Automatic Enrollment | young individuals, non-white individuals, men, unmarried people, individuals with no college degree |
More specifically, light-touch interventions increased plan participation by 0.5 to 0.8 percentage points, which they say translated to an increase of between 9% and 13%. Programs that entail individual interaction and active choice increase contributions by 11 percentage points, which they say spelled an increase of 100%.
Approaches that affect and involve behavior are more effective than simply providing information, Patterson and Skimmyhorn found. Even an action as simple as an email generally was more effective than just providing information.
And despite the importance of other factors, Patterson and Skimmyhorn observe, automatic enrollment still was king. Regardless of variations between different groups, it has a greater effect than any other tool for all groups. They found auto-enrollment increased participation “by an order of magnitude larger” than active choice by employees to participate, which they found to be the next most effective means of accomplishing that goal.
Patterson and Skimmyhorn also note that automatic features are sharply more effective in increasing contribution rates and cumulative contributions.
Employers
But what is most effective for employees may not be what is best for an employer, at least financially, Patterson and Skimmyhorn further reveal. Automatic enrollment was the most effective way to supercharge employee participation across the board, they say, but was the most cost-effective tool only for very large employers. For other employers—small, medium, and large employers—programs through which employees made active choices to participate were the most cost-effective.
