How Simplifying 401k Enrollment Increased Participation by 300% 

Intervention · 

Abstract

Saving for retirement can be a tiresome, confusing, and overwhelming experience for many — so much so that many people forgo investing in retirement planning altogether. According to the Federal Reserve, merely half of all household have any retirement accounts at all.1 While the most effective mechanism of getting people to save and enroll in a 401(k) savings plan at work remains the automatic-enrollment approach — an opt-out tactic whose participation effect is so large that it typically induces near-universal participation — it faces significant backlash. It’s seen by some as coercive in the sense that it locks individuals into a company-chosen contribution rate (often seen as too low) and asset allocation (often seen as too conservative).1 

Researchers examined an alternative to the common automatic-enrollment option used to boost 401(k) participation, Quick Enrollment (QE). They tested to see if this option, which offers employees the choice to opt-in and enroll in the savings plan - by selecting an employer-generated default contribution rate and pre-selected asset allocation - would make retirement saving less complicated and seemingly coercive. They found that implementing the QE option proved effective in increasing participation rates — it tripled participation among newly hired employees relative to the standard active decision approach.

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Rating: 5/5 (significant effects; large sample size; positive impact)

How Quick Enrollment made retirement saving easier 
Condition
Results
New hires offered a Quick Enroll into a 401(k)-savings plan Participation rates tripled within 3 months
Non-participating tenured hires offered a Quick Enroll savings plan 10-20% of formerly non-participating employees enrolled

Key Concepts

Defined Contribution Plan: A retirement savings plan where employees allocate part of their paychecks to a savings account dedicated to fund their retirements.2 

Automatic Enrollment: An opt-out enrollment regime in which employees are automatically subscribed to a 401(k) plan based on the company-chosen default contribution rate and asset allocation.3 

Active Decision Approach: A savings strategy in which the employee is forced to affirmatively choose between participation and non-participation in a 401k plan, and requires the employee to make a retirement savings decision by a certain deadline without guidance from their employer.4

The Problem

Complexity leads to fewer 401k sign-ups

Boston College’s National Retirement Risk Index (NRRI) suggests that stifled access to a 401k at work, which is largely due to the complex nature of enrollment, is one of the primary reasons for the lack of adequate retirement planning that has plagued Americans for decades.5 401(k)s and other types of defined contribution plans depend on individuals to both determine how much they should save for a comfortable retirement, and then to proceed with following through and saving enough. 

Drawbacks for both auto-enroll and full autonomy

While many employers currently offer an auto-enroll option, it’s been met with opposition from employees who argue that individuals aren’t really given the freedom to specify how much they would like to contribute from their paychecks to their 401(k).  On the other hand, the active decision approach — which relegates the entire enrollment process to the employee, has also faced criticism in that it obligates the employee to make a difficult decision in a domain where they may not have much expertise. 

The paradox of choice is especially pronounced in the active decision approach, as it presents employees with a wide array of different contribution rates and asset allocation options and can be easily overwhelming. While previous research has explored the massive increase in participation that happens when employers shift from the active decision approach to that of auto-enrollment, there has yet to be a comprehensive study on the benefits of a more moderate 410(k) enrollment mechanism, both in higher participation numbers and less social backlash.6

Design

3 ways to enrol at 2 firms

Researchers from the National Bureau of Economic Research composed a study to explore how the implementation of a Quick Enroll option, which functions as an opt-in mechanism for enrolling in a 401(k) plan based on company-set contribution rate and asset allocation, can increase participation numbers. The study involved evaluation of three different applications of Quick Enrollment at two different firms. Two of the three implementations were short-term interventions — these targeted currently non-participating employees previously hired by the firms. The third implementation was an ongoing intervention for newly hired employees. 

The 3 ways, unpacked

The first firm targeted was a large 40,000 person health services company that had prior to the intervention used a standard opt-in enrollment process using the active decision approach — employees selected their own contribution rates and investment allocation. 

  • The first implementation introduced Quick Enroll, in which new hires were given physical cards with the option to mark a box initiating 401(k) participation at a contribution rate of 2% of salary and a pre-selected asset allocation (50% in a money market fund and 50% in a balanced fund). 
  • The second implementation offered the same Quick Enroll asset allocation option to previously hired non-participating employees, but this time introduced a web-based means of enrollment offered by meeting with an outside vendor who helped them enroll. It also allowed employees to set their own contribution rate. 

The second firm targeted, a manufacturing firm with 20,000 employees on its roster, had used an active decision approach prior to the intervention. Researchers implemented Quick Approach here by mailing a one-time card to non-participating employees with the option to enroll in the 401(k) plan at a three percent contribution rate invested entirely in a money market fund.

The EAST Framework

To observe the effect of participation fluctuations through the use of a more encouraging opt-in mechanism, researchers used the EAST Framework. This form of intervention comprises 4 primary qualities: Easy, Attractive, Social and Timely. The intervention should be implemented Easily; it must be Attractive, to stimulate attention; it should mind the Social nature of human beings; and it should also be Timely in its procedural implementation.7 

The Quick Enroll option was relatively easy and accessible, as it only involved the participants returning a marked card or participating in a one-time meeting to enroll. It was attractive in the manner in which it offered both new-hires and tenured, non-participating employees the choice to enroll in a guided 401(k) retirement plan, and it was timely in its observation of participation rates over the course of a year’s time.

Results and Application

Quick Enrollment tripled participation for new hires

Findings reflected a huge success for the Quick Enrollment approach — its implementation tripled participation among new hires relative to the standard enrollment mechanism in which employees actively select both a contribution rate and an asset allocation. And when Quick Enrollment was offered to previously hired employees who were not participating in their 401(k) plan, 10% to 20% of these non-participants enrolled in the plan. 

While Quick Enrollment has an overall smaller effect than its automatic-enrollment counterpart, it protects the employer from litigation disputes that may occur — like if they set defaults with equity exposure — because QE is an opt-in mechanism.  

Effective introduction of Quick Enrollment in demystifying the 401(k) enrollment process suggests that guided opt-in programs can work in a variety of settings, and succeed in bolstering participatory power without the level of recoil that opt-out programs often endure.10

Industry
Application
Health Individuals need medical information to better manage their own health. Health-care professionals should be able to provide information outside of individual consultations; however, patient consent may be required. An opt-in structure for follow-up healthcare communication can be a great remedy.2
Public Policy Flipping the pre-selected default choice opt-out to opt-in for organ donation accompanied with an outline of the benefits of doing so can help increase participation numbers in the program.
Consumer Insights The same methodology can be used in email-marketing techniques; by encouraging customers to opt-in to communication outlining the potential perks and discounts of doing so, customer attention can successfully be stimulated.

Ethics

  • The intervention demonstrably improved the lives of participants by allowing them to save for retirement
  • The option to enroll in Quick Enroll was optional so participant autonomy was not violated
  • Demographic data including gender was collected for all active employees
Dimension
Verdict
Comments
Welfare

Does the intervention demonstrably improve the lives of those affected by it?
Positive
Yes, saving for retirement is beneficial.
Does the intervention respect the privacy (including the privacy of identity) of those it affects?
Room for improvement
Demographic information (i.e. birth date, hire date, gender, state of residence, compensation) was collected for all active employees.
Does the intervention have a plan to monitor the safety, effectiveness, and validity of the intervention?
Not applicable
An observational study.
Autonomy

Does the intervention abide by a reasonable degree of consent?
Positive
Participants were invited to the Quick Enroll program.
Does the intervention respect the ability of those it affects to make their own decisions?
Positive
Participants made the decision to enroll.
Does the intervention increase the number of choices available to those it affects?
Positive
Yes, the Quick Enroll option introduced a new contribution rate and asset allocation option.
Equity

Does the intervention acknowledge the perspectives, interests, and preferences of everyone it affects, including traditionally marginalized groups?
Insufficient information
There is no mention.
Are the participants diverse?
Insufficient information
It is unclear; diversity data was not presented.
Does the intervention help ensure a just, equitable distribution of welfare?
Positive
Saving for retirement is a universally beneficial financial decision.

Related TDL Content

Status Quo Bias

Auto-enroll and opt-out options depend on a cognitive bias that reflects our preference for things to remain the same, unaltered in the face of choice even when an alternative opt-in option can garner greater benefit. 

Paradox of Choice

While we might believe that being presented with multiple options actually makes it easier to choose one that we are happy with, having an abundance of options actually requires more effort to make a decision and can leave us feeling unsatisfied with our choice. Read this article to learn more about how having too many options may impact our decision-making.

Sources

[1] Choi, J. J., Laibson, D., Madrian, B. C., & Skinner, J. (2009). 2. Reducing the Complexity Costs of 401 (k) Participation through Quick Enrollment (pp. 57-86). University of Chicago Press.

[2] Hayes, A., & Catalano, T. J. (2021, April 11). Defined-contribution plan. Investopedia. https://www.investopedia.com/terms/d/definedcontributionplan.asp

[3]Retirement topics - Automatic enrollment. (2021, June 3). Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment

[4] Carroll, G. D., Choi, J. J., Laibson, D., Madrian, B. C., & Metrick, A. (2009). Optimal Defaults and Active Decisions. The quarterly journal of economics, 124(4), 1639–1674. https://doi.org/10.1162/qjec.2009.124.4.1639

[5] Munnell, A. H., Chen, A., & Siliciano, R. L. (2021). The National Retirement Risk Index: An Update from the 2019 SCF (No. 21-02). Chicago 

[6]Choi, J. J., Laibson, D., Madrian, B. C., & Skinner, J. (2009). 2. Reducing the Complexity Costs of 401 (k) Participation through Quick Enrollment (pp. 57-86). University of Chicago Press.

[7] EAST framework. (2021, October 1). The Decision Lab. https://thedecisionlab.com/reference-guide/management/east-framework/

[8] Barrett, B. (2019, August 2). 'Opt out' is useless. Let people opt in. Wired. https://www.wired.com/story/hey-apple-opt-out-is-useless/

[9] Tong V, Krass I, Robson S, Aslani P. Opt-in or opt-out health-care communication? A cross-sectional study. Health Expect. 2021 Jun;24(3):776-789. doi: 10.1111/hex.13198. Epub 2021 Mar 24. PMID: 33761176; PMCID: PMC8235885.

[10] The Fed - Table: Survey of consumer finances, 1989 - 2019. (2021, November 4). Federal Reserve Board. https://www.federalreserve.gov/econres/scf/dataviz/scf/table/#series:Retirement_Accounts;demographic:all;population:1;units:have

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