Why It’s So Hard to Fix the 401(k)?

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A few years ago, policy wonks, retirement experts and politicians came up with what they thought was a great way to fix the 401(k) system – automatic enrollment. So in 2006, they passed a law that allowed businesses to put a portion of their employees’ money into 401(k) plans without their permission. The employees were of course allowed to opt out, but few did and retirement savings were supposed to soar. Turns out the result isn’t as good as people expected it would be.

According to a report in today’s Wall Street Journal, the automatic enrollment law has actually lowered retirement savings rates, not raised them as expected. The WSJ found that 40% of the people who were automatically enrolled ended up saving less than they would have if they had signed up for a 401(k) on their own. Overall, the savings rate was down as well, according to a number of different 401(k) plan administrators. At plans managed by Aon Hewitt, for example, the average participant contributed 7.3%, down from 7.9% in 2006, when the law was enacted.

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What’s more, this is not the first time someone has found problems with the automatic enrollment rule. A study from last year found that companies that offered automatic enrollment tended to have a lower match, somewhat negating the effects of the automatic enrollment.

There are some problems with the reporting and analysis here. The Employment Benefits Research Institute, which did the research for WSJ, says it disagrees with the paper’s conclusions, and says it will put up a blog post refuting the findings of the article, though I haven’t seen it yet. But to me the biggest point here is one I made in a TIME cover story nearly two years ago: The 401(k) retirement system is deeply flawed, and little changes are not going to fix it. Here’s why:

First of all, just to clarify, the automatic enrollment rule is not nearly as much of a failure as the WSJ article leads you to believe. There are many more people in 401(k) plans with retirement savings than there were back in 2006. And the overall amount we all are collectively putting away in 401(k) plans a year have risen as well, up 13% since 2006. So automatic enrollment has gotten a lot of new people into the system, they are just predictable coming in at lower levels and the influx of new users is driving the overall savings rate down. And as a public policy issue it is better that we have more people saving more money, even if individually it is at lower rates than we would like. What’s more, an earlier EBRI study found that automatic enrollment dramatically increases the amount low-income workers have in retirement savings.

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What’s more, the lower level of savings is not something academics didn’t foresee. Alicia Munnell, who heads up Boston College’s Center for Retirement Research, says the virtue of automatic enrollment is also its flaw. Inertia. Put people in at a 3% savings rate, and they will save 3% of their salary. But they probably will stay there. Back in 2006, Munnell and others pushed for companies to adopt automatic escalation, which would move worker contributions up over time to say 6%. She says what the WSJ has found reinforces her earlier view. She says the government should make automatic enrollment and escalation mandatory.

But, as we have seen with the automatic enrollment law, there will always be unintended consequences, and it’s likely that rule won’t work as well as expected either. For me, the problem with the 401(k) is not at entry, but at exit. Even if you are saving a healthy portion of your salary what you will end up having in your account at retirement has a lot to do with when you retire. And for those who retired in 2008, the 401(k) program was disastrous. All this adds up to the fact that we need a new retirement savings system. And this is a problem that we are going to have to deal with sooner rather than later. Do nothing, and we are eventually going to have a lot of retired baby boomers who need public assistance. It seemed that when Obama came into office a 401(k) fix was on the agenda. But like with a lot of other things it has vanished from view. That’s too bad.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.

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