Data and Research October 17, 2019

Research Finds No Impact of Auto Enrollment on Debt

A study found “no statistically significant evidence that automatic enrollment increases” consumer debt, but the impact on auto and home debt was more ambiguous.

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The idea has been presented that it makes sense to pay off debt before saving for retirement—especially if the interest paid on debt is greater than the interest earned on retirement savings.

Employers recognize the issue with debt and many have included education about paying off debt in financial wellness programs. And, some employers encourage employees with student loan debt to pay it off and save for retirement at the same time by offering student loan repayment programs. There are numerous ways employers can do this.

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At least one survey has found that “among households under the age of 55, each dollar contributed to a 401(k) plan or similar tax-advantaged retirement account is offset by approximately 40 cents in pre-retirement taxable withdrawals.” The study calls into question whether automatic enrollment in retirement plans is really helping employees with their overall financial security.

However, recent research indicates that forcing employees to save—auto enrollment—does not increase debt levels for retirement plan participants. The study published by the National Bureau for Economic Research (NBER) found “no statistically significant evidence that automatic enrollment increases” consumer debt.

The research looked into the experience of civilian Army employees enrolled in the Federal Thrift Savings Plan (TSP). Prior to August 2010, they had to opt into contributing to the TSP. Starting on August 1, 2010, newly hired employees were automatically enrolled in the TSP at a default contribution rate of 3% of their income unless they opted out.

The researchers also found credit scores indicate automatic enrollment does not increase high-interest debt and financial distress.

In a regression analysis, the researchers also did not find a statistically significant effect of automatic enrollment at 43 to 48 months of tenure on auto debt or first mortgage debt.

This may be the case even if a participant takes a loan from the TSP to fund a home or auto purchase. The researchers explain, “An automatically enrolled household might purchase a more valuable durable because it feels wealthier due to its increased TSP balances. The larger mortgage balance does not represent any contemporaneous net worth reduction in this transaction, since each dollar of borrowed TSP balances has been transformed into a dollar of home equity, and each additional dollar of mortgage debt is offset by an additional dollar of housing asset. Conversely, an automatically enrolled household might extract equity or spend down fewer financial assets to acquire a durable because it has fewer financial assets available.” They say the latter transaction still has no effect on net worth.

However, the researchers concede that they cannot be absolutely sure of the financial impact of auto enrollment on auto and home debt because they did not have non-TSP financial data for the research subjects. There could be implications for future net worth.

The study report, “Borrowing to Save? The Impact of Automatic Enrollment on Debt,” may be downloaded from here.
Compliance October 17, 2019

What’s With All the Hype About the EBSA Reorganization?

The reorganization of the DOL’s Employee Benefits Security Administration may be good news for the retirement plan community.

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Senator Patty Murray, D-Washington, ranking member of the Senate Committee on Health, Education, Labor and Pensions (HELP), seems up-in-arms about the reorganization of the Department of Labor’s Employee Benefits Security Administration (EBSA) that went into effect October 1.

Prior to the reorganization, she sent a letter to Assistant Secretary Preston Rutledge asking him to hold off on the shuffle and requesting answers to more than a dozen questions, as well as documentation of an implementation plan. When the reorganization went into effect, she followed up with a letter saying the agency’s response was “woefully inadequate and unresponsive.” She also stated, “The lack of an adequate response … deepens my concern around the impact it could have on the workers, retirees, and families who turn to EBSA for help with the benefits they rely on.”

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So what’s the big deal?

First of all, according to Michael Kreps, attorney with Groom Law Group in Washington, D.C., as ranking member of the HELP committee, which oversees the DOL, Murray takes that oversight seriously and has “an instinctual interest” in having a better understanding of how the DOL, and particularly the EBSA, operates. “It’s pretty common for folks in senior positions in Congress to inquire about major developments in agencies they oversee,” he says. He points out that lawmakers did the same thing when the Wage and Hour division reorganized in August.

The proposed reorganization appears to be a meaningful structural change from the status quo, shifting some authorities to EBSA’s politically appointed deputy and creating a new director position to oversee regional offices.

Rutledge, a political appointee, oversees the EBSA. Previously, Timothy D. Hauser, a career EBSA staff member was over all operations—national and regional; however, the reorganization has split his position, making him Deputy Assistant Secretary for National Office Operations and naming Amy J. Turner the Deputy Assistant Secretary for Regional Office Operations, another career position.

Kreps explains that the reorganization has also revised the reporting structure so some policy-heavy offices report to Principal Deputy Assistant Secretary Jeanne Klinefelter Wilson, a political appointee.

From conversations in the industry, Hauser has a reputation for being very supportive of a more employee-favorable agenda, although he is seen as a balanced person. So, it could be that Murray is concerned that political people are asserting themselves and trying to limit the extent of Hauser’s role—which could be problematic for people opposed to the current administration. The national office is more employer friendly, so some may see the reorganization as trying to reign in those from field offices that may be giving employers a hard time.

However, from conversations and news reports, that is not how the majority view it.

A positive change

According to Kreps, it appears at the EBSA that a lot of policy issues are run through the second most senior person at the agency. Previously, that was Hauser, but now it is Wilson, a political official. He says there is a justification that when the EBSA makes a policy decision, it should be made by part of the political structure in the administration. “The reorganization seems more about aligning policy decisions and running them all through central political officials,” Kreps says.

He notes that the DOL has historically issued a lot of sub-regulatory guidance—for example, advisory opinions to explain its views. But, Kreps says, starting in the Obama administration and flowing into the Trump administration there has been a shift from sub-regulatory guidance to focusing on large regulatory projects—the fiduciary rule under Obama, and association retirement plans under Trump. “There have been some public statements by DOL officials that they would like to help the industry by issuing more guidance and opening up a process that has been dormant for a while.”

As for the new structure to have someone higher up coordinate the field offices—coordinate the regional offices at a national level—Kreps says it seems important that the EBSA wants to offer consistency. “The EBSA wants to treat similarly situated stakeholders in the same way and make sure the benefits community has rules of the road that are the same for all,” he says. “It also helps the national office have a better sense of what is going on in the field and better process information that is coming in.”

The retirement plan community may see more fairness, as well as guidance, from the reorganization.

“We have a group that works a lot with the EBSA and they deal with some of the most important issues out there, so we are hopeful that [the agency will] be able to engage with the broader community to make positive changes going forward both on the participant and plan sponsor/provider side,” Kreps concludes.

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