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Retirement Made Simpler News
April 13, 2011
Each issue of Retirement Made Simpler News delivers important news, research, updates and more to your inbox. Meet the Organizations
In the News
Is Your 401(k) Set Up to Fail? Here’s How to Fix It
In a recent column, nationally syndicated personal finance writer Jane Brant Quinn asks readers if their employer is blindsiding them with their 401(k). “You might think you’re on track to retirement because your company enrolled you in the plan automatically. What they didn’t say is that they set you up to fail.”
She notes that auto-enrollment has been a great step forward, because it catches people who otherwise wouldn’t save. But, left alone, contributions won’t build a nest egg even close to what you’ll need. Two best practices can go a long way toward helping employees succeed in their retirement savings journey:
- Start automatic enrollments with contributions of at least 6 percent
- Automatically increase that initial amount by at least 2 percent a year, to reach 10 percent as rapidly as possible.
Quinn cites Retirement Made Simpler’s study that shows that well over 80 percent of workers who were enrolled automatically in 401(k)s are grateful for it and started saving earlier than they otherwise would.
Read Jane Bryant Quinn’s Article
Best Practices: The Next Generation of Automatic 401(k) Plans
Adding automatic enrollment increases participation rates of new hires dramatically, particularly among women, minorities and low-income earners. This is an important first step, but more can to be done:
- The same automatic approach can be applied to enroll existing employees who are not in the plan, allow employees to increase contribution levels gradually over time, invest prudently and rebalance investment funds—all without putting the responsibility on the individual to initiate any of these steps.
- Automatic escalation of contributions can gradually increase employees’ overall contributions to 401(k)s. Only about a third of plans take the extra step of increasing that percentage over time. A best practice is to escalate until an employee reaches 9 percent – 12 percent of pay, which goes a long way toward keeping retirement saving on track.
- While not exclusive to Automatic 401(k) plans, automatic rebalancing of investment funds has been on the rise. The need for this feature is clear from a Hewitt study on employee investing behavior. It showed that only 17 percent of participants make fund transfers in a given year. Target retirement date and lifecycle funds typically rebalance as a function of their design. Automatic rebalancing where it doesn’t otherwise occur helps ensure that a participant remains on track with her target allocation.
Read more
Research
Structuring DC Plan Automatic Features to Pump Up Retirement Savings
A new survey by the Defined Contribution Institutional Investment Association examines whether and how plan sponsors are implementing automatic features within their defined contribution plans. Organizations that offer automatic features have increased enrollment by nearly 30 percent above “pre-automatic enrollment” rates. What’s more, these organizations said participants who were automatically enrolled viewed automatic enrollment favorably. Key findings:
- A disconnect between what sponsors believe are optimal participant savings rates (10 percent or more) and the current automatic default rates, which commonly start at 3 percent and escalate (when offered) to only 6 percent.
- Only about one-third of plan sponsors offering automatic enrollment combine it with automatic contribution escalation, potentially hampering employees from achieving an adequate level of retirement savings.
- Seven out of ten plans use target date funds as their default investment option, followed distantly by balanced and risk-based funds.
- Two-thirds of the automatic enrollment plans in the survey had employee opt-out rates of 9 percent or less, with four in 10 reporting rates below 5 percent, suggesting high levels of employee satisfaction.
Survey Highlights
Resources
White Papers on Automatic Issues
Automatic 403(b) Toolkit
Automatic 401(k) Directory
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