Auto-Enrollment in Retirement Plans Could Crimp Savings, GAO Report Says

Automatic enrollment programs could inadvertently reduce defined-contribution plan participants’ potential retirement savings because they could have chosen a higher contribution rate on their own, according to a Government Accountability Office report.

“Some participants would have selected a contribution rate higher than the default rate had they not been subject to automatic enrollment and had they chosen to enroll in the plan voluntarily,” the GAO report says.

The report, conducted for Sen. Herb Kohl, D-Wisconsin, chairman of the Senate Special Committee on Aging, also said some automatically enrolled employees are likely to accept default investment funds, such as money market or stable-value funds, with “relatively low future prospects for return on investment.”

“Low default contribution rates and an apparent lag in the adoption of automatic escalation policies raise questions about the adequacy of long-term savings rates under automatic enrollment,” the GAO report says.

The GAO report also cites concerns that an Obama administration-backed proposal to require employers who aren’t already offering a retirement plan to automatically enroll workers in an IRA could undermine existing and the creation of new 401(k) plans.

“To the extent that the automatic IRA approach offers significantly lower costs—including the relative costs of fiduciary liability—employers may decide against adopting a 401(k) or may eliminate an existing one,” the GAO report says.

Filed by Doug Halonen of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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