Auto-enrollment is Highly Effective But Often More Costly

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Automatically enrolling all new workers in an employer savings plan is a terrific way to push reluctant savers to prepare for a future in old age. They still have the option of withdrawing but usually stick with the plan once an employer signs them up.

The preliminary results of a new study on Army personnel show just how effective auto-enrollment is. The strategy far outstripped other, less interventionist tactics that employers use to increase plan participation.

In 2018, the U.S. Department of Defense implemented auto-enrollment in the federal Thrift Savings Plan for U.S. Army recruits and other new employees and started deducting 3 percent of their pay to deposit into their savings accounts. The plan participation rate for the new service members in January through March 2018 was about 80 percentage points higher than the rate for employees who joined at the end of 2017, before auto-enrollment was in place.

Auto-enrollment, the researchers said, increased participation by “an order of magnitude larger” than the second most-effective strategy: active choice.

In the active choice strategies implemented during 2016 orientations at two Army bases, enlistees were confronted with deciding whether they would start saving now. At Fort Lewis in Washington, for example, new recruits were told to raise their hand if they wanted to enroll in the Thrift Savings Plan and were immediately ushered to computers to sign up. The strategies increased participation by about 9 percentage points.

For years, auto-enrollment has been considered the gold standard by employers and retirement experts, and its popularity has grown since federal legislation in 2006 removed some of the legal barriers that kept employers from trying it. Today, about half of the employer retirement plans in Vanguard’s national client base are automatically enrolling new workers, according to the investment company’s annual savings report.

Given how effective auto-enrollment is, however, the study on Army personnel provided new information that may explain why more companies have not adopted it: cost.

The researchers determined that putting auto-enrollment in place would be much less cost-effective for small employers than the active choice strategy. In a small company, auto-enrollment would cost $253 each to sign up 20 new participants, compared with around $13 each if the company uses an active choice strategy.

But the cost of auto-enrollment drops dramatically for major employers that can spread their start-up costs over thousands of workers. For example, the U.S. Department of Defense paid just one penny each for the 800,000 newly enlisted service members and employees in the study who joined the Thrift Savings Plan in early 2018.

Active choice, the researchers concluded, is “the most cost-effective method to generate new program participation and contributions for small, medium, and large firms, while automatic enrollment is more cost-effective for very large firms.”

To read this study by Richard Patterson and William Skimmyhorn, see “How do Behavioral Approaches to Increase Savings Compare? Evidence from Multiple Interventions in the U.S. Army.”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

David Morse

The blog correctly highlights that auto-enrollment is indeed the gold standard in getting folks to save, but I think the employer cost estimates extrapolated by the study of the US Army’s figures ($253 per participant for a small business) is extremely high. Most 401k providers and payroll vendors already have built auto-enrolment and escalation into their systems and offer canned legally compliant and effective employee communications to small and large employers as part of their standard services package. Thus, the employer’s cost of implementing auto-enrolment is essentially nothing (unless the employer matches those contributions). Indeed, by increasing contribution levels, automatic savings can accelerate asset accumulations, entitling the plan to lower fees.

Joshua Dietch

The research findings are not surprising – that a fixed cost without scale is more expensive than a variable cost independent of scale. Moreover, is lowest cost, in of itself, the best means to evaluate different tactics to improve plan participation? Presumably the overall participation rate is the true arbiter of success. Lastly, the idiosyncrasies of the plan studied make it an outlier among DC plans in the US.

I realize it is very hard to get actual plan data, never mind running natural experiments to do research. However, in other markets it is unlikely that an employer would have to pay to change their plan design to include automatic enrollment. Retirement plan recordkeepers have numerous ways of recouping the cost of implementing automatic enrollment short of issuing, in this study’s case, a $5,000 bill and strong incentive to do so.


Wish I could have been part of it.

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