December 17, 2007
Opting in for Retirement Savings: Who Wins?
Posted by Christine Hurt

I've been collecting blog fodder for awhile, and now that the semester is over (all over but the grading!), I can turn my attention again to the blog.  Last month, I noticed a fairly small article in the Sunday NYT on changes in the 401(k) regulations.  This rules do two things.  First, they allow employers to auto-enroll employees in 401(k) plans, although employees can opt out if they wish.  This rule reverses the traditional "opt in" quality of employer-offered 401(k) plans.  Second, in the absence of direction from the employees, employers must invest these accounts into "mixed portfolios of stocks and fixed-income investments" instead of the usual money market or cash equivalent accounts.  These rules apply not only to new hires, but to current employees.  In combination, these new rules are expected to add an additional $134 billion by 2034 (in 2006 dollars).

Although the gist of the article is that these rules benefit employees, who may avoid enrolling in their companies' 401(k) plans because they are intimidated by making investment decisions, of course these rules benefit another group as well.  This other group, who surely lobbied for this change, is only referred to as an aside:  "While the financial services industry stands to benefit from an increase in investments. . . ."

My second quibble with these rule changes is that they highlight the conflicting messages that the federal government send to investors.  On the one hand, capital markets are safe for the average investor:  Come on in, the investing's fine!  On the other hand, investors are expected to do their homework, make informed investment decisions, and be diversified because neither the SEC or publicly-held corporations are guarantors of investors' choices.  So, how do markets remain efficient when investors are auto-enrolled in stocks not of their choosing?

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Comments (2)

1. Posted by Jake on December 17, 2007 @ 19:06 | Permalink

What is wrong about auto-enrolling employees in 401(k) plans? It beats the heck out of the venerated Social Security system, which also relies on auto-enrollment -- or, to be more accurate, compulsory enrollment with no opt-out provision, a stark contrast to privately administered 401(k) plans.

Thus, Christine misses the mark when she asks, "how do markets remain efficient when investors are auto-enrolled in stocks not of their choosing?" The plain truth is that employees who honestly wish to make their own investment choices can opt out of 401(k) plans.

If only we prisoners of the Social Security system had such liberty.



2. Posted by Kate Litvak on December 17, 2007 @ 20:16 | Permalink
So, how do markets remain efficient when investors are auto-enrolled in stocks not of their choosing?

Marginal investors are not auto-enrolled.

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