foe of workplace productivity-is also the enemy of employees'
401(k) plans, resulting in lower contribution rates, poorly thought-out
fund allocation, and, ultimately, lower long-term returns. So
says Brigitte C. Madrian, an associate professor of economics
at the Graduate School of Business who studies the effects of
automatic enrollment on 401(k) savings and whether financial education
changes savings behavior.
automatically enrolling new employees more than doubles their
participation, it doesn't eliminate procrastination. Indeed, many
new employees don't bother to choose a contribution rate or allocate
their funds, sticking instead with automatic defaults.
new participants are what I would call passive savers-they are
reluctant to make savings decisions on their own," says Madrian,
whose working paper "The Power of Suggestion: Inertia in
401(k) Participation and Savings Behavior" recently appeared
in the GSB's Capital Ideas research quarterly. Passive
savers are the same employees who are less likely to participate
in 401(k) in the absence of automatic enrollment: the young, the
low- paid, and black and Hispanic employees.
gives the example of Minneapolis-based UnitedHealth Group, where
the average employee 401(k) contribution rate was 6.4 percent
of compensation. Employees hired under automatic enrollment, however,
contributed only 4.4 percent. Why the lower rate? Madrian says
76 percent of automatic enrollees contributed the default: 3 percent.
automatic enrollees also allocated their funds differently than
other participants. For example, 15 months after they were enrolled,
three-quarters of automatic enrollees still had their entire 401(k)
balances invested in a money market fund-the default option-despite
eight other choices. After two years, one-third of participants
were still at the automatic default. By contrast, other employees
spread out their investments. Less than 25 percent had their 401(k)
balances invested in just one fund. Other employees also generally
allocated more than 70 percent of their contributions to stocks,
with under 10 percent going into the money market.
suggests several ways for employers to encourage employees to
save: a higher default contribution rate or one that increases
over time and a less conservative default fund. Simplifying investment
choices and offering investment education may also help.
employees feel very comfortable making retirement-savings and
investment decisions," she says, "but many are overwhelmed
when they face too many options. These are the folks who end up