In many ways, automation can add tremendous value to the process of personal money management. However, the increased use of automation in 401(k) and other workplace retirement plans is raising questions about when automation goes too far.
Let’s face it, if left to our own in-the-moment decision-making, most of us would rather spend than save. Delayed gratification does not come naturally.
Here’s where automation can help.
In our household, we automatically transfer a chunk of money from checking to savings each month. A few days after it hits our savings account, we have our online bank automatically divide that chunk into various sub-accounts where funds are earmarked for periodic expenses such as annual life insurance premiums, semi-annual vehicle insurance premiums, Christmas gifts, vacations, and more.
We also use Mint.com, which automatically records most of our cash flow. It even automatically categorizes the income and expenses and tells us how we’re doing compared with our plan.
And, as many people do, we automatically put a percentage of each paycheck into a 401(k) plan.
In each of these cases, automation is a huge help. We’re committed to saving for upcoming expenses, monitoring our cash flow, and investing for our later years, but we only had to choose to do each of these things once. The follow-through is on autopilot.
No thinking required
The ability to automatically put a portion of each paycheck into a workplace retirement plan has been common for a long time. A more recent use of automation in this space has been the automatic enrollment of new employees into the retirement plan. Instead of having to choose to participate (opt-in), at many workplaces new hires need to opt-out if they don’t want to participate. This aspect of automation has proven helpful in increasing participation rates.
Some companies have also added the ability for workers to automatically increase the percentage of salary they contribute to their plan over time. This, too, is very helpful.
But there are two even newer forms of automation that may have crossed a line from helping people follow through on commitments to thinking for them.
First is the automated placement of a new worker’s retirement plan contributions into a target-date fund. The idea is that many people don’t understand what asset allocation is all about, so instead of educating them on the matter, companies are automatically placing people’s money in funds that automate the asset allocation process.
Second is similar but even more aggressive. It’s “re-enrollment,” which involves changing a current worker’s fund selections to a target-date fund. As a Wall Street Journal article noted, “Rather than just pointing new hires in an appropriate direction for retirement saving, re-enrollment involves overriding the investment choices that current employees have made over time.”
Re-enrollment is an opt-out process. If you want to go back to your own investment selections, you have to opt-out of re-enrollment.
In most cases, re-enrollment is used only when a company changes 401(k) record keepers or changes its investment lineup, but the Journal article said employers are allowed to use it “if they deem employees are not properly diversified.”
Advocates say re-enrollment is needed because many workers never change their asset allocation and may end up taking too much risk as they get older. Detractors call it paternalistic and point out that workplace plan administrators don’t know each worker’s full investment picture (they may have other investment accounts, such as IRAs), so default re-enrollment investments may do more harm than good.
Put me in the detractor camp. We’ve pointed out the shortcomings of target-date funds before. More importantly, making and implementing financial decisions for adults under the guise of knowing what’s best for them is indeed paternalistic. It’s a process that will lower financial literacy and personal responsibility while increasing feelings of entitlement. What’s your point of view?