Auto-Enrollment: Elixir and Intoxicant

John Iekel

The belle of the retirement plan participation ball is auto enrollment. And a potent tool it is. But a recent article suggests it may not only be an elixir — it also may cause a delayed hangover.

In “Why Automating Retirement Savings May Not Be Enough,” an article appearing in Psychology Today,” Utpal Dholakia argues that auto enrollment, while useful, is not perfect.

Dholakia cites some of the conventional reasons why auto enrollment may be helpful, such as its serving as a means to better ensure income adequate to meet needs over a longer span of time due to increasing average longevity.

But he also looks to psychology for a different perspective on why auto-enrollment can be a great — or not so great — plan feature.

Procrastination, for instance, can be easy to fall prey to, but can be a siren song when it comes to retirement readiness since delay in starting, managing and adjusting a retirement account and its allocations can have long-lasting ripple effects. Auto enrollment can help overcome that very human foible, Dholakia suggests.

But Dholakia believes that while auto enrollment may be an antidote to procrastination, the cure can have nasty — and similar — side effects.

One of them: inertia. Auto enrollment “may create the illusion that one’s retirement is taken care of, making people falsely complacent and unprepared,” Dholakia says. Another: complacency. He worries that auto enrollment “may encourage passivity in personal finances, and steer some individuals away from taking the time and making the effort to learn (link is external) about their own personal finances, how to make investments, etc. and make prudent investing decisions.” Interestingly, he suggests that many participants in defined contribution plans adopt the hands-off, not-my-problem mindset of a participant in a defined benefit plan — which, he argues, is to their detriment.

Dholakia suggests that it is critical to consider auto enrollment a part of the answer to preparing for retirement. “The problem,” he says, is when it is regarded “as a complete solution rather than one piece of a complex and difficult set of behaviors that we will need to perform and integrate into our lifestyles.”

John Iekel is Senior Editor and Writer for the NTSA and is editor of The 403(b) Advisor.