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Is Automatic Enrollment Consistent with a Life Cycle Model?

By Walecia Konrad · June 04, 2021 · 3 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Is Automatic Enrollment Consistent with a Life Cycle Model?

The need to increase retirement savings among American workers has been studied at length and is often a cause of concern. Among non-retired adults surveyed in 2019-May 2020, one-fourth said they had no retirement savings at all, reports the Federal Reserve. Among those respondents who do have savings, only 37 percent thought their retirement accounts were “on track.”

To help remedy the retirement savings gap, employers have increasingly been implementing automatic enrollment in retirement savings programs for all new hires. With this tool, an employee is automatically enrolled in the company’s 401(k) or other retirement savings program and employees who don’t want to participate must actively opt out of the enrollment. About 65 percent of large employers with more than 500 employees have instituted automated retirement savings, and 35 percent of employers overall have done so, according to the Society for Human Resources Management.

Rethinking Automatic Enrollment for Younger Workers

Now a new study by the National Bureau of Economic Research, questions whether automated enrollment is the right move for every employee. Young employees at the beginning of the life cycle model may find that for them it makes more sense to focus on other financial goals and delay retirement savings until their late thirties or even forties, concludes the working paper, published in January 2021.

The study’s authors, Jason Scott, John B. Shoven, Sita Slavov, and John G Watson, maintain that there are many competing financial needs for young workers. These workers are likely at the lowest-earning rung of their careers and may be burdened by student loans and/or credit card debt. They may also be facing the high costs that can be associated with starting a household, embarking on a marriage, and becoming a parent. In the current low-interest rate environment, calculated spending may make more sense for these employees than long-term savings at this stage.

The study uses a model based on a millennial born in 1995 who begins work at age 25 and retires at age 67. In addition, the study assumes the typical college graduate’s earnings at age 25 are only 42 percent of the peak earnings he or she will make at age 45 or 50. Given those assumptions, “not saving for retirement in the early years of one’s career may be completely optimal and rational in a life-cycle model,” according to the study’s authors.

Meeting Workers’ Financial Needs Where They Are

There are many other assumptions, formulas, and methodologies described in the report that may spark discussion and debate among HR pros. But perhaps most significantly, the study brings to light questions about how best to implement automatic retirement savings programs and how to integrate retirement savings goals within life cycle financial wellness planning.

The study also touches on several related trends currently being explored in the HR community and by SoFi at Work. In order to successfully address equity and diversity issues in the workplace, deal with the pandemic, and meet employees where they are in life, many employers have been embracing a more flexible financial wellness approach that goes beyond retirement planning. This includes the introduction of benefits like emergency savings programs, homeownership benefits, college savings programs, and benefits for new parents that employees may feel are more relevant to their current financial concerns than long-term savings.

That said, no HR professional wants to take lightly the importance of employees’ lolong-terminancial goals and stability. The added security of long-term retirement savings can help employees feel more financially stable, which may help increase their loyalty and productivity.

The Takeaway

We at SoFi at Work do agree with some of the study’s findings around matching financial well-being to life stage. However, until longitudinal data support telling people not to save for long-term as well as short-term goals, we aren’t confident about that advice.

At SoFi at Work we coach employers on plan design to make sure that employees get their money right today, as well as in the future.

Photo credit: iStock/Pekic


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