When Auto-Enrollment May Do More Harm Than Good

The National Tax-Deferred Savings Association (NTSA) and its members find themselves in a position to oppose a Maryland senate bill mandating auto-enrollment for teachers and state employees in supplemental retirement plans. 

While the American Retirement Association (ARA) and its related organizations usually advocate strongly for the inclusion of auto features in retirement plans, it’s not a catch-all to use in every situation, according to NTSA Executive Director Nathan Glassey. In this case, it may do more harm than good. 
 
“We generally fight for auto-enrollment throughout the country,” Glassey explained. “With 401(k)s, that’s the individual’s main retirement plan. Without any contributions, they’re in big trouble.” 
 
Yet school districts use defined benefit plans (DB), a pension arrangement used less frequently in recent decades. Participants in Maryland’s plan must contribute 7%. They also contribute 6.2% to Social Security, which is not always required for educators across the country. 
 
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“So, they’re contributing 7% into the DB plan and another 6.2% to Social Security,” Glassey added. “The state is now looking to mandate another 3% from their paycheck. Given the average teacher’s salary size, it might result in untenable reductions in take-home pay.” 
 
Reasons for Opposing 
 
In a letter to State Sen. Guy Guzzone (D-Howard), Chair Budget and Taxation Committee, Glassey noted three reasons for the opposition. 

1. First, mandating enrollment exclusively into the Maryland program “limits choice and stifles discretion” available to local government retirement plan sponsors. Plan sponsors can currently determine the plan type, default savings rates, plan features, investment options, and plan providers that are most appropriate for their employees. State of Maryland governmental institutions that now use alternative 457(b) or 403(b) plans would be prohibited from automatically enrolling employees into a plan of their choice.

2. Second, automatic enrollment would require a default into either the pre-tax or Roth option and would effectively eliminate the tax and savings considerations that each participant should consider before enrolling in a retirement plan. Consideration should be given to determine if pre-tax or Roth contributions result in the most tax-efficient retirement outcomes for each individual saving for retirement. 

3. Third, many employees enjoy relationships with licensed and credentialed financial advisors resulting from the 457(b) and 403(b) choices available through their employers. A new state-mandated plan could disrupt those relationships and hinder the employee’s ability to access quality financial advice easily. 

“This is difficult because I can’t sit here and say these people don’t need more contributions to retirement plans; of course they do,” Glassey concluded. “Yet, although it could be a burden on that individual, we want them to be able to sit with someone and determine if it is in their best interest to contribute to a supplemental plan. It should also be their right to determine which product, vendor, and advisor is best for them and their retirement if they do. In this case, when you auto-enroll, you take all those options away.”
 
Andrew Remo, Director of Federal & State Legislative Affairs for the American Retirement Association, contributed to this report.