How Opt Out Keeps People In


When companies first introduced 401(k) retirement plans in the early 1980s, employees needed to be briefed on their benefits. These days, most people already know the upside of this type of saving vehicle. The main challenge is persuading them to sign up when they have so many demands on their incomes.

That’s why some companies are switching to automatic enrollment plans, where the employee must take action to get out of the program. Olivia Mitchell, head of the Pension Research Council at the Wharton School of the University of Pennsylvania, says the opt-out version of the traditional 401(k) retirement plan is nothing short of a revolution in favor of retirees. “They have spread like wildfire,” she says, especially after the Pension Preservation Act of 2006 clarified the rules. She adds that she only sees them growing in the future.

Ann Combs was a U.S. Assistant Secretary of Labor when questions started proliferating from companies about how to get more of their employees to participate in 401(k) plans. “There is a theory in economic behavioral theory that people tend toward inertia,” says Combs. “Whether they are intimidated by something new like a 401(k) or don’t feel smart enough to use it or whatever, [the plans] were not as popular as they should have been.”

Employers were leery of forming plans in which they would enroll employees automatically. Some were concerned about running afoul of state garnishment laws by taking workers’ money and saving it for them, says Combs, now the head of the government relations department at Vanguard, the mutual fund company.

Combs, who helped draft the Pension Preservation Act, says that while there was wrangling over some parts of the law, there was bipartisan support for defining the legal issues to allow opt-out plans. Today, nearly one-third of the more than 2,000 plans Vanguard administers have an automatic enrollment. Most federal agencies have also gone the opt-out route.

Fidelity, a Vanguard competitor, says 76 percent of 20- to 24-year-old workers stay in its opt-out plans, compared with 20 percent who sign up for opt-in plans. Getting young people in early means they are not “waiting until 35 or 40 with mortgages, so they start saving late and too little,” says Combs.


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