But automation does not mean an individual contributing to a retirement plan should avoid thinking about and making educated investment choices. What it does mean is that the educational component of retirement savings needs to fit into today's auto-pilot mindset.
Even with automatic features, a worker saving in a 401(k) plan still has choices, and there is no question about the value of education. But the opportunity lies in the delivery of that guidance.
Automation and education can work in tandem
To understand how investor education can contribute to retirement income success, consider the role of drivers' education in highway safety. No one would question the value of both classroom instruction and hands-on tutoring in enabling new drivers to start driving safely. We all have certainly benefited from instruction, and most would admit that experience reinforces that education.
It may not take more than another driver's horn to alert you that you forgot to use a turn signal, or the incessant tone of the indicator reminding you that you did not fasten your seatbelt. And few would contest the idea that safety is dramatically improved by such structural elements as airbags, anti-lock brakes, and crush-resistant passenger compartments.
And while it may be helpful for drivers to have some general understanding of how automobiles actually function, the majority of people are only interested in knowing how to drive successfully.
But there is likely a minority of drivers who seek more intensive education and training on driving techniques. Some may also want to learn mechanics and tinker with their car's design and systems.
Many investors rely on auto-features
Similarly, an auto-pilot design in a retirement savings plan can segment a workforce into several components with different educational needs.
A large number - perhaps a majority- of younger, or newer participants, may have little interest in investments, markets, or the economy and may only want to follow the cues created for them in a plan's basic recommendations. They may require little more than regular information explaining the advantages offered by a plan's defaults, and periodic guidance that encourages them to "stay the course" in times of volatility.
For the segment of workers who will completely opt out of participation, the plan should offer targeted educational outreach and annual re-enrollment together with another opt-out choice, much like the indicator reminding you to fasten your seatbelt.
Still, another significant portion of the employee population will comprise self-directed investors. This group, like drivers who want to "tinker under the hood," will want to take charge and actively manage their own investment choices, either from those offered by the plan sponsor or through a brokerage window if the plan provides one. This segment will likely require access to robust online and mobile services, regular communications on investments, and in-person seminars.
The Pension Protection Act set the stage for plan design
The passage of the Pension Protection Act of 2006 heralded an era of innovation in workplace savings. Automatic enrollment, auto-escalation of deferrals, and auto-default to lifecycle or balanced funds have proven to have more impact on the basic variables of plan participation, deferral, and allocation than any reasonable expenditure on communications and education.
Auto-plan design requires a more carefully focused and segmented educational effort, which may have the potential of being both less expensive for the plan sponsor and more effective in terms of participants' actual results.
A targeted educational effort that increases participation levels could guide savers to improved income replacement rates in retirement, which is, after all, the defining goal.