Auto-enrolled for more debt?

RESEARCH ON 401(K) SHOWS LINK BETWEEN CONTRIBUTION TYPE, PRICIER HOME PURCHASE

Given the stock market boom, workers opening their 401(k) statements are likely to be surprised by the balance, especially since many of them never even went to the trouble of establishing the account.

“Auto-enrollment,” whereby employees are in a company’s 401(k) unless they specifically “opt-out,” has become a widespread practice, since it’s the best way to get lots of workers to participate in these plans, which divert part of workers’ pay into the retirement savings account.

Now, research shows that workers who were auto-enrolled took on an average of $4,131 more in mortgage debt compared to similar employees who signed up on their own. Debt for auto and consumer loans also increased by $1,563.

The bigger mortgage balance might not be a bad thing, notes Brigitte Madrian, a Harvard professor and one of the five academics who conducted the study.

The auto-enrolled may be “feeling more wealthy and purchasing a more expensive home with a bigger mortgage,” Madrian explains.

With each monthly payment, borrowers whittle down the balance and own more of their home outright. If the home value appreciates, “Buying a more expensive home would give you a bigger dollar gain,” notes Yale’s James Choi, another of the researchers.

But that thinking is uncertain. Over the long haul, stock prices appreciate at a greater rate than home prices, Choi notes. And, although the study didn’t identify if the auto-enrolled workers borrowed from their 401(k) to help fund a down payment, they likely could have, since higher-priced homes require great down payments.

People should understand 401(k) borrowing rules, says Neil Lloyd, of research firm Mercer. Employees that take a loan from their 401(k) must pay themselves back before leaving the company, or they face a tax bill. Still, the forced savings of auto-enrollment can help younger workers who place a priority on buying a home, and it “could even enhance the case for auto-enrollment,” Lloyd adds.