Auto enrollment in 401(k)s takes the guesswork out of retirement

Saving for retirement is something that every American should be doing. But in reality, many do not.

That's why many financial experts, government officials and even businesses themselves are increasingly advocating automatic savings plans to prepare for retirement.

Tim Guilford, a registered principal at Raymond James Financial Services, says "procrastination and inertia" are the most common hurdles to savers, and that automatic enrollment in a company-sponsored plan like a 401(k) is a great way to counteract those challenges and cut through the guesswork.

"To be honest, nobody takes finance classes other than nerds like me," says Guilford, who oversees about 75 different company-sponsored retirement plans. "So when you're presented on your first day of work with a list of all our funds and asked how much you want to put in our plan, people are poorly equipped to make those decisions."

It's not just the intimidation factor, but the fact that saving is emotionally difficult for many of us. Humans psychologically "frame savings as a loss," as UCLA economist Shlomo Benartzi put it in a 2011 TED talk, because our spending necessarily is reduced in the short term. That pain affects behavior more than any long-term benefits we won't experience for years or even decades to come.

Rather than ask workers to overcome these hurdles, then, automatic enrollment in a 401(k) simply removes those barriers altogether.

To be clear, automatic enrollment in a 401(k) plan doesn't mean workers give up rights or choices. It simply means that instead of asking workers to make a conscious effort to enroll in a retirement plan, they are opted in. Any worker in such a system can always choose to change contribution levels and/or the investment options for those funds, or cancel participation altogether.

But very few people stop contributing to their 401(k) once they're automatically enrolled, says Geno Cufone, senior vice president of retirement administration at retirement services firm Ascensus.

"Our statistics tell us that less than 1% of workers that are automatically enrolled into a retirement plan choose to opt out," Cufone says. "In other words, if you help workers do the right thing, they rarely take steps to undo it."

Still, while workers seem to be comfortable with automatic enrollment, Cufone notes that only 18% of the 40,000-plus retirement plans serviced by Ascensus automatically enroll their employees in a 401(k) or similar plan.

That's because of an interesting challenge created by auto enrollment: A dramatic increase in 401(k) participation could sometimes result in increased costs for a company.

For instance, Guilford notes that a policy of providing generous matching funds naturally costs more under automatic enrollment, because higher savings participation means higher employer contributions. Also, Cufone notes that companies with seasonal workers or high turnover could find themselves with many low-balance accounts, which can increase administrative expenses of the retirement plan.

But while there may be challenges for employers, there also are material benefits, too.

Guilford notes that in addition to a company providing an attractive core benefit via retirement planning, it "may actually come out ahead on total benefits expenses," because older workers will ideally have enough savings that they can retire on time and move off company health insurance plans when they are the most at-risk and costly to cover.

Additionally, younger workers can move up the org chart when older workers have the means to retire on time. While some older workers are, indeed, quite productive, no company wants jaded workers who have mentally checked out but simply can't afford to retire yet, Guilford says.

As for the workers themselves, "There are very few drawbacks, if any" to auto enrollment, Cufone says. The plans are effective, and saving for retirement is something everyone needs to do.

Guilford agrees.

"We're trying to get everybody to do it," he says. "I think it automates the process and is a better outcome for both the plan sponsor and the participant."

For all these reasons and more, automatic enrollment is gaining momentum. In fact, President Obama recently recommended the automatic enrollment of workers in an employer-sponsored retirement plan — or, if a plan like a 401(k) isn't available, automatic enrollment in an IRA instead.

Of course, auto enrollment isn't a panacea to Americans' retirement planning challenges.

For instance, auto-enrollment at a low rate of savings still may not result in a big enough nest egg for workers to retire comfortably. A 2013 report from the Center for Retirement Research at Boston College showed that if you start workers at a low default contribution, they rarely take action to increase savings rates over time and still may wind up unprepared for retirement.

That means if you are automatically enrolled, you still need to pay attention to how much you're saving.

Furthermore, Guilford notes that 401(k)s largely are wealth-accumulation tools, and he would like to see a better way of distributing savings upon retirement.

But the bottom line is auto-enrollment is increasingly seen as the next step in employer-sponsored retirement plans, because it gets past the confusion and paralysis that is so common when someone is faced with investment options for the first time.

"Auto enrollment uses the inertia that had traditionally worked against workers to work for them," Cufone says.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.