Originally Published by TIAA.
A study released today by the TIAA Institute found employees who withdraw from their defined contribution accounts before retirement age, a practice known as “leakage,” limit the potential increase of their retirement plan savings due to automatic enrollment by 40 percent.
The study, titled “Potential vs. Realized Savings under Automatic Enrollment,” analyzed the savings plan outcomes of nearly 15,000 employees at a Fortune 500 financial service company. The study compared those hired 12 months before the company introduced automatic enrollment at a 2 percent default-contribution rate with those hired in the 12 months following the change.
The results indicate that automatic enrollment increases total potential retirement account balances by 7 percent of starting pay eight years after hire. However, leakage in the form of pre-retirement loans and withdrawals that are not rolled over into another qualified savings plan account for 3 percent of starting pay bringing the net effect of automatic enrollment down to a 4 to 5 percent balance increase in the same timeframe.
“As more employees gain access to automatic enrollment plans, it’s important to understand how individual financial decisions can impact the evolution of retirement balances over time,” said Stephanie Bell-Rose, Head of the TIAA Institute. “This study provides valuable insight about the effect that automatic enrollment and pre-retirement leakage have on savings accumulation. We hope that this study and our continued support for research on the topic will improve decisionmaking and help individuals achieve retirement income security.”
In addition, the study uncovered substantial differences between individuals who remained employed at the firm and those who left. Leakage offsets relatively little of the incremental savings generated by automatic enrollment for those who remained employed, but it had a significant effect on retirement accumulation for individuals who left the firm. For the latter group, leakage decreased the potential incremental savings from automatic enrollment by more than half at low levels of tenure, and still exceeded 40 percent when measured at eight years.
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