Investing is arguably the most complicated topic within personal finance. That point was brought home by a recent New York Times article in which Harvard Economist Sendhil Mullainathan candidly shared his own struggles with investing and concluded that investing is just too difficult for most people.

Investor confusion has given rise to a host of products and ideas designed to make investing easier. But could the good intentions behind such initiatives actually be making people less knowledgeable about investing and overly dependent on others?

Set it and forget it?

One of the most obvious examples of a simplified investment product is the target-date fund. Introduced in the mid 1990s, such funds are now available at many mutual fund companies. An investor need only know the year of his or her intended retirement and the fund will then handle the asset allocation chores, setting the fund’s initial stock/bond mix based on the investor’s time frame, and then automatically making that mix more conservative as time goes by.

There’s much to like about target-date funds. However, many investors don’t realize that funds with the same target dates but offered by different fund companies may have very different designs, with one taking far more risk than another. Some target-date fund investors found this out the hard way during the recession of 2008 when their target-date 2010 funds, with their implied conservative asset allocations, suffered heavy losses. (We’ll have more on this topic in the August newsletter, which is set to go online this Wednesday).

The opt-out retirement plan

In the olden days, when you joined a company that offered a 401(k) plan, it was up to you to choose to participate. You had to opt in. Today, opt-in plans are being replaced by opt-out plans. Participation is automatic. If you don’t want to save for retirement, you have to choose not to.

This has driven retirement plan participation and retention rates upward. However, the typical default contribution rate is just 3% of salary, a figure that’s far too low to generate adequate retirement savings for most people. It’s also lower than the rate chosen by people participating in opt-in plans. While employees are free to contribute more, most never increase their contribution rate.

A smaller number of companies automatically increase the percentage that employees contribute over time (“auto-escalation”).

What’s wrong with automation?

I’m a fan of financial automation—to a degree. I like having a portion of my salary automatically deposited into our company 401(k) plan every time I get paid. Same thing with our periodic bills and expenses savings account. Once a month, we have our checking account set up to take one-twelfth of the annual amount needed for our life insurance premiums, vehicle insurance premiums, vacations, Christmas gifts, and all other periodic bills or expenses and automatically transfer that amount to savings. In these cases, automation saves me some time. It can also reduce the temptation to use that money for something else. If I had to make the decision to save every time I got paid, I’d like to think I would, but it’s nice that the transfers keep happening without me having to make those decisions every month.

At some point, however, a line can get crossed that turns the helpful aspects of automation harmful.

Automatically enrolling people into a 401(k) plan can be a helpful way to get people started saving for their later years. It can become harmful when people assume that the default contribution rate will be sufficient and never learn to estimate how much they really should save by using one of the many online retirement calculators that are readily available.

Using a target-date fund can be helpful for a person just getting started with investing, perhaps with only small amounts available to contribute and a limited set of investment choices. It can become harmful when people assume their fund’s asset allocation and “glide path” (how the fund changes its investment mix over time) are appropriate for them or that the fund will protect them from loss in a market downturn.

The realist in me understands the need to help people along with automated investing solutions. The idealist in me would prefer that we raise new generations of people who are knowledgeable about investing and better able to make informed investing decisions.

What are your thoughts on automated investing? Is it a decent solution for helping the masses get some of the essentials of investing right? Or could it be making people less informed about investing than they should be and overly dependent on others to make decisions that may or may not be in their best interests?