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Automatic enrollment has gained a following. What about one-click IRA/401(k) consolidation?

The scattered-accounts problem is actually a risk with the auto-I.R.A., too. Its architects envision a strict limit on the number of investment choices. That makes it different from normal I.R.A.’s, where you can often invest in whatever you’d like. Even if all auto-I.R.A.’s offered the same limited menu, no matter which bank or brokerage was administering it, account owners could still end up with a bunch of different I.R.A.’s years from now. Mark Iwry, nonresident senior fellow at the Brookings Institution, said that he and David John, a senior fellow at the Heritage Foundation, who together came up with the auto-I.R.A. idea, were well aware of this potential problem. “Our direction is to facilitate the potential consolidation,” Mr. Iwry said...“You’re told that you have two I.R.A.’s, here’s where they are, and if you want to combine them you could just click here.” If that sounds a bit messy, well, that’s the paradox of simplification. “Simplifying is a lot of work. It’s a complex undertaking,” said Pamela F. Olson, a partner at Skadden Arps in Washington, who was assistant secretary for tax policy at the Treasury Department during George W. Bush’s first term as president...In fact, it’s hard to get people riled up about the topic in the first place.

Or as another tax lawyer in the story notes, “There’s no real constituency for simplification." Actually, there is a constituency. It's just large and diffuse, and therefore, unlikely to organize. Hat tip: Amelia Kaye

On page 37:

Making Saving for Retirement Easier as the Economy Recovers. Over the long-term families need personal savings, in addition to Social Security, to prepare for retirement and to fall back on during tough economic times like these. However, 75 million working Americans—roughly half the workforce—currently lack access to employer-based retirement plans. In addition, the existing incentives to save for retirement are weak or non-existent for the majority of middle and low-income households. The President’s 2010 Budget lays the groundwork for the future establishment of a system of automatic workplace pensions, on top of and clearly outside Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. Research has shown that the key to saving is to make it automatic and simple. Under this proposal, employees will be automatically enrolled in workplace pension plans—and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. The result will be that workers will be automatically enrolled in some form of savings vehicle when they go to work—making it easy for them to save while also allowing them to opt out if their family or individual circumstances make it particularly difficult or unwise to save. Experts estimate that this program will dramatically increase the savings participation rate for low and middle-income workers to around 80 percent.

The idea draws praise from bloggers at both Heritage and the Nation. The trend of companies offering automatic enrollment is slowing. Strangely, more than half of them say they aren't adding automatic enrollment because of the increased costs of an employer match. Strange, since the two can be uncoupled easily.

The Pension Protection Act of 2006 gave companies some carrots for adopting auto-enrollment 401(k) plans, a favorite nudge of ours. A paper out earlier this summer by the Employee Benefit Research Institute draws some preliminary conclusions about its effect - chiefly that there is a "very significant positive impact in generating additional retirement savings for many workers, especially for low-income workers." (Go here for the full summary)

For example, under one set of assumptions used in the Issue Brief, the median 401(k) accumulations for the lowest-income quartile of workers currently age 25–29 (assuming all 401(k) plans were voluntary enrollment) would only be 0.1 times final earnings at age 65 (this is largely due to the fact that 41 percent of workers—as opposed to participants—were assumed to have zero balances at age 65). However, if all 401(k) plans are assumed to be using the safe harbor automatic enrollment provisions under PPA, the median 401(k) accumulations for the lowest-income quartile jumps to 2.5 times final earnings under the most conservative assumptions and 4.5 times final earnings under the set of assumptions most beneficial to participants.

Even among higher paid workers the increases are considerable. The multiple jumps from 1.8 times final earnings under a voluntary enrollment scenario to between 6.5 to 10.4 times final earnings under an automatic enrollment scenario, depending on one's assumptions about automatic escalation of contributions. While individual company adoption of auto-enrollment is good for that company's workers, a bigger lesson of the paper is the need for universal adoption. In an age when workers switch jobs more frequently than ever, the risks to saving among many, especially those predisposed not to enroll, are large. Based on projections by the authors (with some assumptions for average savings rates and salaries), individuals who are automatically enrolled in a 401k at their work and remain there for life end up with median replacement rates at retirement ranging from 51–69 percent. The replacement rate is the percentage of a worker’s final salary that is replaced in retirement by a nominal annuity purchased with 401(k) assets. If a worker switches jobs, however, and only has an average chance of being automatically enrolled, the replacement rate range drops to 21-26 percent. That's serious money. Hat tip: Mostly Economics