Features designed to get more employees participating in retirement savings plans may have actually reduced overall retirement savings, according to new research involving a Clemson University economics professor.
Auto enrollment in employer-sponsored matching contribution plans has been considered a way to get more workers to participate in a retirement plan than would sign up on their own.
But while participation rates are higher, savings rates have decreased since auto-enrollment was introduced, said Patrick Warren, a Clemson economics professor who researched matching contribution retirement plans with two New York University professors.
“People overestimate how much they’re going to save,” Warren said. “Forty percent of employees who participate in a plan that includes employer-matching contributions do not contribute enough to qualify for the maximum match.”
Warren said employers offer matching contribution programs because they are attractive to potential employees and because they are encouraged by regulations and through tax incentives.
“There’s a difference between what’s most attractive and what’s most valuable,” he said.
Often times, a worker has to decide what is most valuable – a job with a smaller match and bigger wage or one with a bigger match and smaller wage. If they choose the plan with the bigger match and don’t save what they think they will, they could receive less total compensation, Warren said.
Warren said one way to combat the problem is for government to end employers’ incentives for matching plans and instead encourage them to make straight-up contributions to workers’ 401(k) plans.
In addition, employers should counsel employees about non-discretionary saving plans at the time they’re hired. Warren said that could increase the attractiveness of non-matching plans.
