Retirement Plan Leakage Thwarts Automatic Enrollment

A TIAA study finds the feature's benefit are continuously offset by pre-retirement withdrawals and plan loans. 

With benefits from kick starting retirement savings to fostering participant engagement, automatic enrollment has proven itself to be an important plan feature. Yet, this does not acquit it from including its own set of drawbacks.  

A recent TIAA Institute survey examined the utilization of outstanding loans and withdrawals in accordance to automatic enrollment, otherwise known as “leakage” and found that “among households under the age of 55, each dollar contributed to a 401(k) plan or similar tax-advantaged retirement account is offset by approximately 40 cents in pre-retirement taxable withdrawals.” While automatic enrollment generates positive effects, the report argues how these results are counterweighed by pre-retirement withdrawals.

Survey results were extracted from a Fortune 500 company, when the company had initiated a 2% default contribution rate for employees hired after July 2005 until 2013. The study compared employees hired in the first year after the automatic enrollment implementation, to those employed during in the 12 months prior.  

Among other findings, the study reported automatic enrollment raised “total potential retirement system balance by 7% of starting pay eight years after hire.” However, unrolled loans and withdrawals increased by 3% of starting pay, which in turn, offsets “approximately 40% of the potential increase in savings from automatic enrollment,” according to the study.

Additionally, the study says automatic enrollment at the company elevated retirement system balances by 4% to 5% of “first year pay eight years after hire.” However, for those tenured employees who remained with the company, leakage in the form of plan loans were found to offset 9% to 27% of potential savings. For low-level tenured employees who no longer stayed with the company, leakage (as non-rollover withdrawals) accounted for over half of budding savings. The study points out that while these numbers decline for separated employees over time, the rate after eight years still surpassed 40%.

More information about the study can be found here.