Top of Mind

The Dirty Little Secret of Auto-Enrollment?

Generally, automatic enrollment has been a positive development for retirement plans, as it forces individuals who may not ordinarily save to do so at an important time - the commencement of their working careers.

However, auto-enrollment is not a panacea. For example, it has negatively impacted the average account balance size of many plans, particularly where there is high turnover; and smaller average account balances equals higher fees.

A new study reveals a potential “dirty little secret” of auto-enrollment; namely, that auto-enrollees incur more debt than non-auto-enrollees. I say potential, however, because the type of debt that increases is not unsecured debt (such as credit cards), but rather debt that is used to secure assets (such as auto loans and first mortgages). And, of course, this is just one study, but it is consistent with the notion that if we are forcing people to save their earnings via auto-enrollment, this earnings reduction can only be offset by either increasing earnings, reducing expenses or incurring debt for something the earnings would have normally been used to finance.

If the study proves to be valid and consistent with other studies performed in this regard, it is not terribly shocking that the latter option will be the path of least resistance for many auto-enrollees. After all, this is a population that is not electing to save on their own, so they are probably not practicing the types of financial habits that would enable them to save voluntarily. These habits would include finding ways to increase earnings and/or reduce expenses, as we profiled in our recent Top of Mind on earning more or spending less. Thus, the natural alternative would be to increase debt to offset the earnings loss. 

Should plan sponsors abandon auto-enrollment due to this issue? Absolutely not. But it emphasizes the importance of integrating auto-enrollment with a strong financial wellness program, so that employees are not simply exchanging savings for debt.

Do you have any unintended consequences of auto-enrollment that you wish to share? Feel free to fill me in on the details via Twitter or at

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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