On the list of things you'd like to sign up for, having more money taken out of your paycheck each month probably ranks just above electrolysis.

That may be one of the reasons people aren't investing enough in their 401(k)s -- and that, in turn, means they could come up short on cash in retirement.

So you have to award points to a solution that exploits human inertia from the opposite angle. Under this strategy, rather than wait for people to sign up for a retirement plan on their own, an employer automatically enrolls its employees in a plan, then gives them the choice to opt out.

"The wonderful backstop is that these programs enable people to drop out whenever they want to," says Martha Priddy Patterson, director of human capital advisory services at Deloitte & Touche. "But once enrolled, most people don't tend to drop out."

Automatic enrollment is in no way a panacea. But done right, it can solve some of the inherent problems with 401(k)s: Left to their own devices, people don't save enough or invest very well for retirement. Automatic enrollment is particularly effective when a plan requires employees to put decent-sized contributions into their accounts and makes sure that 401(k) investments will generate strong long-term returns. Given that 401(k) success stories are looking rare these days, the strategy deserves a closer look.

First, a little background. Automatic enrollment has gained in popularity in the last couple of years, after the Internal Revenue Service approved the strategy as long as employees have the choice to opt out. (The IRS decides whether a given 401(k) plan qualifies as a tax-qualified plan.) In 2001, about 14% of the companies surveyed automatically enrolled participants in 401(k) plans, according to a study by Deloitte & Touche, up from 11% the year before. And another 23% said they were considering adding the feature.

On the plus side -- as you'd expect -- the number of people enrolled in 401(k)s is at a high level under automatic enrollment plans, typically reaching 95%, according to Hewitt Associates, a benefits consulting firm.

On the downside, there are two basic problems with many plans. First, new enrollees who fail to pick an investment are typically assigned a default option -- often a money market fund or stable value fund (insurance products with a fixed rate of interest). A Deloitte & Touche 2001 survey found that 57% of all default options were short-term investments such as stable value funds or money market funds. Companies typically chose such conservative investments because they fear they'll get sued if the default option is more aggressive. Both options, however, are too conservative to offer decent long-term returns.

Second, more than half of automatic enrollment plans require employees to kick in only 3% of their salaries. That's a puny sum by any means, and usually one that's too low to qualify for company matching contributions. Typically companies only kick in matches if a worker has set aside at least 6% of his salary.

But despite the above caveats, don't disregard automatic enrollment. A well-designed automatic enrollment plan, as part of a broader retirement planning campaign, makes sense. "Who could argue with the premise that getting more people enrolled in a 401(k) is better?" says George Kirchwey, director of research for fixed income and a trustee of the 401(k) plan at Penson Financial Services, a Dallas-based securities clearing firm.

His own company offers a neat case study of how automatic enrollment can significantly boost the value of a 401(k) plan -- as long as it's accompanied by other common-sense strategies.

Before Penson overhauled its 401(k), only 35% of its employees had signed up for the plan. In response, at the behest of Dallas-based pension consultant Brooks Hamilton, Penson rolled out an automatic enrollment plan that makes it a hassle for employees who decide not to participate.

Employees now have to agree to opt out of the plan in writing and have the document signed by a notary. If they're married, the spouse has to agree in writing to an opt-out, too. The results: only seven people, out of a workforce of around 400, chose not to take part in the 401(k) plan.

Next, Hamilton tackled the low contribution rate among employees. The average employee at Penson invested only 2% of his paycheck. To fix that problem, Penson settled on a relatively generous default rate of 5% of employee paychecks.

But the final and most worrying problem was that the company's 401(k) accounts were collectively losing money. In both 2000 and 2001, the accounts, which were invested among 17 Fidelity mutual funds, collectively posted negative returns. Though that was partly a function of a lousy market, Hamilton chalks up the performance to apathetic investors. "If you give people 15 or 20 funds to pick from, all indications are that the choices they make are dismal, and there's a huge gap between those that do well and those that do poorly," he explains. "In the average company, the average participant is simply a disinterested novice. And what would you expect from a disinterested novice?"

To fix that problem, Hamilton overhauled the company's confusing mix of funds, introducing a menu of six easy-to-understand, professionally managed investments grouped by risk. Now Penson employees chose one of six equity-based investment options ranging from low risk to aggressive, with expected annual returns of 6%, 8%, 10%, 12%, 13% and 14% respectively.

The default investment, composed of institutional-class actively managed funds, is designed to generate 13% returns over time.

But how well has the new program been received among Penson's employees? "There was resistance and concern at first from employees because Fidelity was such a known quantity," acknowledges Kirchwey. "But we essentially cut management fees in half, which increases employees' return, and that's what we were after."

The ultimate proof of the program's popularity: Though Penson offered workers the option of sticking with the menu of Fidelity funds, only 4% of the workforce took that option. "The numbers speak for themselves," says Kirchwey.