Growing Auto-Enrollment in 401(k)s May Hide Another Problem

If you’ve been paying attention to company retirement plans in recent years, you know the number of people contributing to 401(k)s has risen nationwide. According to a 2015 study by Fidelity Thought Leadership, 401(k) participation has gone from 64.1% in 2007 to 69.7% in 2014.

The slow but steady uptick is largely due to auto-enrollment (AE). Automatically signing up new hires for a 401(k) became popular with employers about the same time growth in participation began trending upward. At the same time, participation in non-AE plans has been substantially lower and is falling.

When Fidelity compared the rates of participation for AE vs. non-AE plans, they found participation in non-AE plans has dipped about 6% in the past eight years while it’s risen 7% in AE plans, all the way to 85.6% in 2014.

AE is useful because many workers who wouldn’t normally participate in any other way end up in the plan—clearly a boon for companies using AE. And if your company is one of them, it’s easy to think you’ve solved the problem of getting your employees on track to retire well.

Unfortunately there’s more to a solid retirement than enrolling in a company plan. Even if most of your team is participating in your 401(k), they might not be investing 15% of their income, the optimal level to be on track by the end of their careers.

The Dark Side of 401(k) Participation

And there’s a darker side to the growth of 401(k) participation—corresponding loans. The same Fidelity study showed a substantial increase in outstanding average loan balances taken from 401(k)s the past 10 years. From 2005 to 2015, the average participant loan amount rose from $7,820 to $9,820, a 25% increase.

The majority of the funds were likely withdrawn to make ends meet when workers faced emergencies like car repairs or medical bills—stuff that happens to everyone. But without a plan in place to handle emergencies, people use funds they’ve set aside for tomorrow to solve immediate problems today.

The rise in loans shows many are struggling with their daily finances. That’s what happens when broke people contribute to a retirement plan without first solving the larger financial problems they’re facing—debt and a lack of emergency funds.

Regardless of your team’s level of enrollment, 401(k) participation isn’t nearly as important for their long-term financial health as the more basic issues of eliminating debt and learning to budget. So when the water heater inevitably breaks, they can write a check to replace it and keep their 401(k) intact.

As great as AE has been for the appearance of 401(k) growth, it hasn’t really been much help for the people borrowing the money back out. It’s time to find a financial wellness program that can show your employees how to make lasting behavior changes with the money they are earning today so they can ultimately take the proper steps toward a truly secure future.

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