401k auto-enrollment doesn't stop workers from taking on more debt, economists say
- Auto-enrollment in 401k plans should help plan holders save for retirement, but many employees are essentially offsetting their savings by getting more mortgages, car loans and student loans, The Wall Street Journal reports.
- A group of economists discovered the trend in a recent study due reportedly presented last weekend at the American Economic Association’s annual meeting in Philadelphia. The study also found that, while auto and mortgage debt increased, credit-card debt among employees auto-enrolled in 401ks was no higher than that of workers who were required to sign up for a 401k on their own, the Journal says.
- One of the authors of the study, James Choi, professor of finance at the Yale School of Management, told the Journal that while 401k auto-enrollees do take on larger amounts of debt, that debt generally isn't charged at a higher interest rate, like credit-card debt or a second mortgage.
The auto-enrollment trend has grown increasingly more commonplace in the workforce as companies look for ways to combat growing employee debt, particularly among younger generations (who typically own more student debt, but who also lack extensive financial literacy).
Some observers are bullish on auto-enrollment, saying that such plans promote behavioral changes (i.e. increased saving) over plan education, which can eat up resources. But it's not exactly the silver bullet to solving the many complications plaguing retirement overall. Shifting workforce models, affected by the presence of older workers who haven't decided to leave the workplace as early as their predecessors have, may force the conversation around retirement savings to change permanently.
Employees’ financial well-being will likely be one of the top priorities for HR in 2018. With that, employers might need to stress the need for employees to take on debt using their 401k funds with caution. Additional regulatory changes and an explosion of financial wellness apps will force employers to vet their options carefully when rolling out, and maintaining, their office 401k plan.