automatic enrollment

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It’s called the Automatic 401k re-enrollment. The WSJ reports:

In a bid to help employees get their retirement savings on track, more 401(k)-plan sponsors are shifting workers’ 401(k) dollars out of their current investment allocations and into the plan’s default option—usually a target-date fund.

It’s called re-enrolling. Employees have the options of sticking with their current investment selection, if it’s still offered, or choosing another mix. But in a re-enrollment, unless the participant specifically opts out, his or her 401(k) will be re-allocated to the company’s chosen default investment.

As with automatic enrollment, opt-out rates are low.

Mr. Reish and his colleagues, who represent several major 401(k) providers, were initially worried about potential push-back from employees. However, only one worker complained, saying a target-date fund would be too conservative, he says. Others opted out with no gripes about the process.

All told, about half of the employees re-elected their prior investment selection or selected some other investment strategy.

Employees who opt out are more likely to be better educated, older and more affluent than those who accept the default, says Mr. Utkus.

Reish & Reicher’s opt-out rate was higher than most companies that undergo a re-enrollment.

Indeed, for companies moving their 401(k) plans to T. Rowe Price Group, the acceptance rate is much higher and has increased in recent years, says Carol Waddell, director of product development for the company’s retirement-plan-services unit. Among employers that shifted their 401(k) plans to T. Rowe Price and conducted a plan “reset,” roughly 87% of all participants remain in the target-date fund 18 months after the conversion, she says. Ms. Waddell adds that 57% of plans transferred to T. Rowe Price in 2009 conducted plan resets for their employees, compared with 14% in 2005.

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The feds gave states extra Medicaid money based on how many public health insurance eligible children they could sign-up. Alabama was the big winner thanks to some pre-filled forms. The NYT reports:

Alabama will receive a $55 million bonus, more than twice as much as any other state, for having 133,000 more children on its Medicaid rolls than projected by a formulated base line, according to the Department of Health and Human Services.

To make enrollment easier, Alabama has eliminated asset tests for children, ended requirements for an in-person interview and allowed children to remain eligible for a year without renewal. It also sends out renewal forms with blanks filled in when data is known, and allows applicants to verify their forms with an electronic signature. The state has adopted “express lane eligibility” so that Medicaid application processors can use income findings from other safety net programs to validate eligibility.

Hat tip: Benjamin Littenberg.

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Faced with restaurant manager churn, McDonald’s decided to offer a generous company match to its 401k plans. Automatic enrollment with a 1 percent automatic annual deferral of salary were the default rules. To “ease the pain” of the 1 percent deferral, the company gave managers a one time 1 percent bump in salary. Hat tip: Kare Anderson.

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Automatic enrollment is an idea with broad support across various socioeconomic and political groups. Still, as anyone who has ever observed politics in action, widespread support is no guarantee of adoption. What messages about the benefits of automatic enrollment into a retirement account do people find most appealing? An AARP (Association of American Retired Persons) survey of adults conducted last year, prior to the Obama administration’s proposed nudges, offered respondents six potential reasons.

1) An automatic IRA is a way to help workers save for themselves with a transportable savings account.

2) The cost to all of us is more people don’t start saving for retirement.

3) The 50 million new American workers who will be encouraged to save.

4) Encouraging low-income workers to save.

5) The IRA is a simple and practical way to save.

6) Small businesses that can’t match employee contributions can still provide an attractive savings vehicle to their workers.

Of the options, a majority found the first two “very convincing.” The rest ranged from 33-47 percent.

The most persuasive message in support of the Auto IRA proposal focuses on the portability of the account and the idea that it “enables workers to help themselves.” Promoting personal responsibility is a persuasive message in support of the Auto IRA. Another strong message highlights the cost to all Americans in the future if we do not encourage people to save for retirement now.

The interesting takeaway for policymakers looking to construct popular financial savings legislation and then sell it to citizens is that the idea of automatic enrollment is complimented nicely by a separate idea that is still is part of the bigger theme of simplicity: Portability. What people appeared to tell this pollster was that they preferred the simplest of products: One account that goes with you to any job. Message to financial professionals: The 401k rollover process is cumbersome and annoying.

Again, automatic enrollment is popular whether these specific messages are attached to it. But if you’re looking to devise a law that people support today, and will result in a product they’re likely to support and use 10 years from now, portability should be part or your legislation.

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1) Using a web form to register people at your site? Trying to boost conversion rates? Consider a mad libs style form.

2) What behavioral economics can add to the health care debate.

3) Talk of the Nation’s Science Friday asks how nudges can help people save energy. Segment runs 13 minutes.

4) Automatic enrollment coming to Canada?

5) A subscription service for lazy guys that will send fresh socks, t-shirts, and underwear every three months. Hat tip: Raj Shah.

6) In the U.K., casinos require memberships. Once you fill out the paperwork, you have to wait 24 hours before going to the casino.

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…for workers over age 22 in a new supplementary State retirement plan, if they aren’t participating in a better plan at their work. We’ll come back to what’s “better” in a minute. The choice architecture of the Irish plan is stronger than the plans used here in the U.S. and therefore bound to be more controversial. People who sign up get bonus payments from the government if they stay in for five years, and if someone opts-out, they are automatically re-enrolled again every two years. In other words, you have to keep opting out of the plan.

Over at the Geary Behavioural Economics Blog, Liam Delaney offers some excellent observations about the whole reform plan, which goes beyond automatic enrollment. Compared to the U.S., the plan is a generous one. One of its features is a 4 percent matching contribution that is split between an employer and the government. If a worker is in a plan that matches at higher levels–and therefore is “better”–that worker is not placed automatically in the State plan. But what if an employer’s “worse” plan currently matches at lower levels? asks Delaney.

The employer contributions aspects create strange incentives for employers. For example, a company with 100 workers earning 20-40k per year that currently has a pension scheme with 30 per cent take-up, could find themselves with an extra fifty thousand or so per year to pay in terms of staff costs. While the employer would be obliged under the current scheme to enroll people onto the pension plan, they would not be obliged to enthusiastically endorse this to their workers. The social interactions that take place in this regard are interesting to think about. In general, the employer response to a national automatic enrollment scheme where the employers are bearing a good chunk of the costs is an element not usually present in the US literature.

Addendum: Conversation about the new pension system here.

Addendum Too: 12 skeptical questions about the plan from Constantin Gurdgiev.

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