Research Finds No Impact of Auto Enrollment on Debt

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.

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.