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According to a Wall Street Journal analysis, a 2006 law allowing companies to automatically enroll employees into a 401(k) was intended to encourage them to save for retirement. But instead of encouraging employees to save more, the law is having the opposite effect. This type of auto-enrollment policy was popularized by Cass Sunstein, a Chicago University Law School professor, in his book Nudge. Today Mr. Sunstein works for the Obama administration as the Administrator of the Office of Information and Regulatory Affairs. 

So much for the “nudge” helping out, since, according to the analysis 40% of new hires with automatic enrollments are saving less money than if they had been left alone and allowed to enroll on their own. The reason: the majority of companies set the contribution rates at 3% of salary or less. That’s well below the 5% to 10% contribution rates participants typically elect when left to enroll on their own. And thanks to inertia, the low contribution rates from the auto-enrollment tend to remain low.

Companies claim the reason they keep the default contribution rates so low is because they don’t want employees dropping out of the plan. But there is another, more realistic, reason too. According to a 2011 Aon Hewitt survey, 73% of employers opt not to increase the default contribution rate higher because of the increased cost of the employer match. And that’s how too much government hurts middle-class savers.

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.
E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.