A Hit Job from the Wall Street Journal

Last Updated Jul 10, 2011 1:30 PM EDT

When the Pension Protection Act (PPA) was signed in 2006, it was hailed as an important step in shoring up the retirement security for millions of Americans. But is it having the opposite effect?

That's the assertion made in an article that ran on the front page of the Wall Street Journal this past week, but don't make the mistake of accepting it at face value.

Ask anyone who works with numbers for a living, and they'll tell you that there's myriad ways to get them to say whatever you want, and it seems that was precisely what the Journal did in this particular article.

By most accounts, the PPA has had a tremendous impact. More than half of all large companies now automatically enroll employees in their retirement plans -- which was one of the PPA's primary goals -- and participation rates for those plans with auto enrollment are 85 percent, versus 67 percent for those plans without that feature.

Now make no mistake -- the PPA is far from a cure all. No one's going to fund a secure retirement by contributing a paltry three percent of their pay (which is the typical default contribution rate for auto enrolled employees), but the fact of the matter is that a large number of employees will be better off for having saved something, which is a vast improvement over where they would have been without having been automatically enrolled.

But the Journal's article claimed that auto enrollment ends up lowering retirement savings. Why? Because inertia kicks in after many employees are auto enrolled, and they fail to increase their savings rate. The Journal quoted a study which found that up to 40 percent of employees would have contributed a higher amount if they weren't auto enrolled.

Further, the Journal ominously reported that auto enrollment is driving down the average contribution rate of retirement plan participants.

But the reality is that there's less there than meets the eye. Perhaps the Journal was shocked, for instance, that average contribution rates would fall when you add millions of employees to these plans at a lower-than-average contribution rate of three percent, but, thanks to that fifth grade math class so many years ago, I was not.

A better -- and fairer -- assessment of the impact of auto enrollment would be to average contribution rates across all eligible employees, including those who choose not to participate.

That's precisely what Vanguard did in their How America Saves study, and they found that when you include those employees who are not making any contributions to their retirement plans, plans with an auto enrollment feature have a deferral rates a full percentage point above those without.

As to the Journal's claim that auto-enrolled employees tend not to increase their contribution rates, I don't quite know what to say. Perhaps it's true that 40 percent of those employees would have chosen a higher deferral rate. (I'm a bit skeptical of the claim, but let's accept it at face value.) The flip side of that is that 60 percent of employees -- a solid majority -- are better off thanks to auto enrollment.

It was hard to read the Journal's article without getting the impression that the reporter was working hard to present a one-sided view of the PPA. They worked so hard, in fact, that the Employee Benefit Research Institute (EBRI), which authored the study that the Journal's article was based upon, immediately posted a refutation of Journal article on their website, in which they noted that the 40 percent figure that the Journal highlighted was the most pessimistic of the 15 different assumed scenarios that their study included -- the story ignored those other analyses, perhaps because they reflected well on the PPA. EBRI also criticized the Journal for failing to note that the PPA is actually "increasing retirement savings for many more [employees] -- especially the lowest-income 401(k) participants."

Don't get me wrong; our nation's retirement system is hardly in great shape. As I and, particularly, Eric Schurenberg, have written before, there's no lack of evidence indicating that the vast majority of Americans are shockingly ill-prepared to finance their own retirement. And much of that has to do with 401(k) plans' flaws, which include:
    • The assumption that most employees will overcome their tendency towards inertia and assume the primary role in determining their retirement security
    • The assumption that most employees are able to determine how much they need to contribute to fund a decades-long retirement
    • The assumption that most employees are capable of making wise investment decisions
    • The fact that most plans -- particularly smaller company plans -- are egregiously expensive
    • The fact that employers can discontinue their matching contributions whenever they like
    • The fact that employees can choose not to participate
    • The fact that most plans allow employees to take loans
    • The fact that most employees end up cashing out their plan when they change jobs
I could go on. Clearly, if the Journal wanted to write about the dire straits of our retirement system, there is rich vein to mine. But instead they chose to focus on one small change that has been made -- a change which by nearly every fair assessment has been successful -- and attempted to call into question its effectiveness with an article that was extraordinarily slanted; one that was well beneath the Journal's normally high journalistic standards.

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  • Nathan Hale

    View all articles by Nathan Hale on CBS MoneyWatch »
    Nathan Hale has spent decades working in the financial services industry, during which he has researched and written extensively about personal investing, the mutual fund industry, and financial services. In this role, he uses a nom de plume because many of his opinions about the mutual fund industry and its practices would not endear him to its participants.

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