Does Automatic Saving Really Work?
They may not be the magic bullet we once assumed
When it comes to saving for retirement, one of the biggest hurdles is consistency.
When you use a retirement savings calculator, one of the most important variables is how much you save every month—and the assumption that you stick to that plan without fail for many years or decades.
That’s why I am a big fan of automatic savings policies—like enrolling employees into 401(k) plans by default and gradually increasing their contribution rates over time.
Set it and forget it, right?
Well… Not quite.
New research reveals that these policies might not be the magic bullet they seem.
Here’s what the data says about the blind spots in automatic savings plans and how you can avoid some very common mistakes.
The Good, The Bad, and The Leaks
The study titled "Smaller than We Thought? The Effect of Automatic Savings Policies" analyzed data from nine companies using automatic enrollment and auto-escalation policies. While these policies boosted retirement savings, their effects were smaller than expected.
Automatic enrollment works, but with limits. It increases savings rates by about 0.6% of income. That’s helpful but not exactly a game-changer.
Auto-escalation sounds great on paper, but too many people opt out. Only 43% of employees stuck with it, and the number dropped even more over time. This I find slightly surprising as behavioral economics tells us that people tend to stick with whatever the default option is. This means we would expect people auto-enrolled in a savings plan to stick with it—except they don’t.
Job turnover and withdrawals take a big bite out of savings. When employees leave their jobs, they cash out 42% of their 401(k) balances. That’s a major problem. The auto savings you’ve spent years doing only has an impact if you hang onto it until retirement.
DIY savers often catch up. Employees who weren’t automatically enrolled often increased their contributions over time, closing much of the savings gap. I find this slightly encouraging as not everyone is fortunate enough to have a workplace that matches retirement savings or provides auto-enrollment in those plans.