In spite of legislation that has made it more difficult for workers to opt out of their 401(k) plans, as many as one in five do just that. And a surprising number of advisers say that's not necessarily the wrong choice.
No one can be forced to save for retirement, but automatically enrolling employees in 401(k) plans was supposed to come close. And in the five years since the Pension Protection Act gave companies legal cover to default their workers into the plans, participation is up -- opting out is apparently too much of a hassle for most employees. But even at companies that enroll every new employee as a matter of course, the dropout rate remains between 10% and 20%, a figure that seems stubborn to change, experts say. "Frankly I'm stunned that it's that high," says Roger Wohlner, of Asset Strategy Consultants. "You can lead a person to water, but you can't make them drink. More education is clearly needed here and more access to advice."
Companies have recently stepped up education efforts to convince employees it's in their best interest to rejoin the plans, but the tactic that has proven most successful is automatically re-enrolling employees every year, says David Wray, president of the Profit Sharing/401k Council of America. "Companies find that over time, employees get worn down, and they get a few more people each year."
Most people who opt out of their 401(k) plans do so because they need the money, Jeanne Thompson, Fidelity's vice president of retirement insights, says. Younger and lower-paid workers are the likeliest to drop out with 25% of employees earning between $20,000 to $40,000 not participating compared to just 8% of those earning more than $100,000, she says. Among plans administered by Fidelity, 10% of automatically enrolled employees opt out of their plans, and another 8% reduce their contributions from the default, which typically ranges from 3% to 6%.
Still, the dropout rate is lower than in plans that don't automatically enroll their workers. Nationally, 31% of employees do not participate in their company-offered plans, according to the Bureau of Labor Statistics. For low-wage workers, that proportion jumps to 58%, according to Fidelity.
For those who aren't in dire financial straits, conventional wisdom holds that dropping out of one's 401(k) is generally as foolish as dropping out of high school. But there are some exceptions. If there is no company match, says Charles Buck, a financial planner in Minnesota, investors may be better off with a Roth IRA, if they qualify. A Roth IRA at a brokerage will offer more investment options, he says, many with lower fees. Also, for young people who may be saving to buy a house, a Roth IRA allows savers to withdraw their principal, penalty-free. Buck's advice to his own 30-year-old son: "Participate only to the limits of the employer match, and fund a Roth IRA with the rest."
Other advisers say that poor investment choices, or high expenses, can be a good reason to opt-out of a 401(k) plan. The best 401(k) plans charges employees as little as 10 basis points, says Mike Alfred, CEO of BrightScope, which rates plans nationwide. "There are also plans with expensive insurance costs that can run as high as 9% -- investing in a high fee 401k plan can cost a worker hundreds of thousands of dollars in lost savings over their working career when compared to a lower cost plan. In cases where all-in fees get that high, it's hard to argue with an adviser's assertion that the participant might be better served to invest elsewhere."