If we didn’t have to deal with politics or lobbying by corporations and financial service companies, how would we design the ideal 401(k) plan?

For starters, I’ve suggested in some recent columns that 401(k)s should be made more like IRAs, giving participants unlimited investment options.

Yet, to protect foolish investors from themselves, I’ve sided with critics who think there should be a legal limit on the portion of a 401(k) account that can be invested in the employer’s stock. And I’ve suggested that the choice of 401(k) administrators and investment counselors should be taken out of the employers’ hands and given to a committee of employees.

But, of course, I write a column for do-it-yourselfers. What about all those 401(k) participants who don’t have the time, ability or inclination to actively manage their own accounts?

A sobering study by Wharton finance Professor Andrew Metrick and three colleagues finds that the typical 401(k) investor simply accepts his plan’s “defaults” Â the investment options automatically assigned by the plan if the employee takes no action. Hence, the employer, in designing the plan, in effect becomes the employee’s investment manager.

“For better or for worse, plan administrators can manipulate the path of least resistance to powerfully influence the savings and investment choices of their employees,” the authors wrote in the study, “Defined Contribution Pensions: Plan Rules, Participant Choices and the Path of Least Resistance.”

“Specifically,” the authors added, “at any point in time employees are likely to do whatever requires the least current effort.”

Study’s results

The study looked at plans at seven unnamed companies with a combined 200,000 employees. Each plan underwent a significant change, allowing a comparison of employee behavior before and after.

Three companies changed the rules so that new employees were automatically enrolled in the plans unless they chose not to be, reversing the previous requirement that they sign up to participate.

Before enrollment became automatic, 26 percent to 43 percent of the employees at the three firms were participating six months after being hired. After automatic enrollment began, participation at the six-month anniversary rose to 86 percent to 96 percent. Those employees stuck with the plans even though they had the right to pull out. They were still participating at substantially higher rates three years after being hired.

The study also found that employees who were automatically enrolled tended to contribute at the default levels assigned by the plan, even though they had the right to raise or lower the percentage of income saved. Since these default rates were a low 2 percent to 3 percent, the automatic enrollees tended to put in less than employees who participated only by choice. Unanswered is the intriguing question of whether the automatic enrollees would have continued to contribute much larger amounts if that had been the default.

One company established a program called “Save More Tomorrow,” which asked employees to agree to automatically increase their contributions as they received future raises. The plan was offered to employees who had resisted raising their contributions. Most agreed  and then gradually raised their contribution rates from 3.5 percent of income to 11.6 percent. In fact, they ended up contributing more than employees who were not offered this option because they’d already embraced the idea of deferring more salary for retirement purposes.

Conclusion

For policymakers, the study’s implications are clear: There’s no such thing as an uninvolved employer; the very design of the plan will determine how employees behave.

A key feature of any good plan, then, should be automatic enrollment with high contribution rates. Obviously, employees who don’t want to take part should have the right to withdraw. But, with 401(k) plans becoming Americans’ primary retirement-funding source, it should take more effort to get out of a plan than to get into one.