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.