“What sane person doesn’t maximize their 401(k) savings and company matching?” asks Miss Snarkypants in an entry to the transcript of the piece on “How do companies boost 401k enrollment? Make it Automatic” on NPR last Monday, April 21.

My first job, before starting a fee only advisory firm, when I got out of college was with Gartner Group.  As a 22 year old, I was responsible for helping people enroll in the 401k programs.  Gartner, an IT consulting company, provided a 6% match as well as a program to take a portion of your payroll and invest at 80 cents on the dollar into the company’s stock. In 6 months, you could sell the stock at full value.  Only a third of people invested in the 401k, while less than 20% invested in the stock purchase program. Why didn’t more employees enroll in this “free money”?

Twenty years later, as an investment advisor in Colorado Springs and Denver, making those investments was one of the best choices I could have made.  Why didn’t I do this then? I was interested in finance and making sure I invested.  But this is not the case for everyone.

Clovis Sangrill posted this story on the NPR blog:
My daughter received a lump-sum annuity payment from the state teachers’ retirement system when her schoolteacher mother died. I told her that I needed $5000 and borrowed the money from her. Then I used it to open an IRA in her name and to make a second-year contribution. Once the IRA was a fact on the ground, I gave her my lecture on saving for retirement. That was when she was twenty. Every year since then — she is now 35 — she has made the maximum annual contribution to her IRA. I know her well enough to say that if I had not used a subterfuge to get her started, she would still be hemming and hawing about getting started on retirement saving. But once the initial step had been taken, she became enthusiastic about following up on it. I think automatic deduction by employers will have the same effect on employees. 

In my own observation, people are up against two very difficult obstacles: First, we currently live in a very busy world – and we are all trying to do too much.  Second, it is hard to prioritize something which you will need in 20, 30, 40 years’ time.

Consequently, this is why some individuals in the government want to make 401k enrolments mandatory. This is so that employees will have to opt out, whereas some companies are trying to find a better way to help their employees.

It is very hard to convince someone in their 20s, 30s and even 40s to save money that they cannot spend until their 60s, because it requires sacrifice and second, discipline.

So companies are now starting to automatically enroll individuals into the 401k plans.

Rob Austin is director of retirement research at Aon Hewitt, a retirement and pension consulting firm working with large companies. He has found that there is an increase in large companies (in the S&P 500) who apply an automatic enrollment. Up to 60% are now doing this. When employees are automatically enrolled, Arnold says that 84.6% of employees participate.

Automatic enrollment gets individuals past one of the two hurdles I see (i.e. having time to sit down and understand the paperwork to enroll.)

Many individuals know that they should be saving for the future, but it takes discipline and sometimes a little nudge.

Miss Snarkypants also posted this:

My husband works for a company that treats their employees to an ‘investor’s lunch’ once a month where they discuss economic issues, the stock market, and so on. It’s just pizza and sandwiches but still, it’s free. The catch… you have to be actively saving in the company 401(k). After they started this program participation went to nearly 100%.

Maybe that was just the nudge. When people feel left out, they can’t go to the pizza lunch then they want to be with the “In Crowd.”

If companies want to help their employees, they will automatically enroll them, or help them sign up. It is also beneficial to have a “coach” preferably that is a Certified Financial Planner (CFP) to hold them accountable and help individuals make the financial decisions because many people do not receive instructions in personal finance like what Clovis Sangrill gave his daughter.

By James Cornehlsen, CFA

Keywords: 401k, automatic enrollment, participation rate