Study: 401(k) auto-enrollment encouraging more workers to save for retirement

by Jim Sloan

A new study shows that a 2006 law that allows companies to automatically enroll their workers in their 401(k) plans is encouraging more people to save but may be prompting them to save less than they would if they had voluntarily enrolled in the retirement savings accounts.

The study was commissioned by the Wall Street Journal and was conducted by the Employee Benefit Research Institute (EBRI). It found that most companies set contribution rates for auto-enrollees at 3 percent of salary or less, and that many employees simply stay at that rate, which is far below the 5 to 10 percent voluntary participants typically chose for their savings accounts.

The study found that 40 percent of new hires at companies with auto enrollment are putting less into their savings accounts than they would if they had voluntarily joined up. The result: Although the annual amount of money being put into 401(k) accounts has increased 13 percent since 2006 and the total number of workers saving for retirement has increased, billions of dollars are being "left on the table" because workers are not increasing their savings rates above the initial 3 percent, the Journal reported.

Savings rates are low

EBRI, however, took exception to the Journal's interpretation of its findings. The Journal's report on the study asserted that automatic enrollment is actually reducing the savings for some people, EBRI said, but failed to mention that it is increasing the savings rates for many more workers, particularly low-income workers who otherwise would have no investments for their retirement.

EBRI was actually pretty upbeat about auto-enrollment in a retirement savings account. Although many workers stay at the low 3 percent saving rates, these are people who were saving nothing before. Their participation would naturally cause average savings account balances to decline because they earn less than other participants with 401(k) investments.

Is auto-enrollment working?

EBRI's study examined a wide variety of assumptions about savings rates and participation. It found that with the most optimistic assumptions, nearly 80 percent of lower-income workers could retire with at least 80 percent of their current income when they combined their 401(k) investments with their Social Security benefits and that 64 percent of the highest-income workers could achieve this measure of successful retirement.

The Journal reported the most pessimistic assumptions and found that only 45.7 of lowest-income workers and 27 percent of the highest-income workers could attain 80 percent of their income under automatic enrollment.

What's the best savings rates?

The number of large companies automatically enrolling new employees for a 401(k) savings account has increased from 24 percent in 2006 to 57 percent in 2010. Employees can opt out, but most don't: the Journal reported that 85 percent of the employees auto enrolled stay in the savings account program, while only 67 percent of those working for a company without auto-enrollment join the program.

One issue, however, is the auto-enrollment savings rate of 3 percent or lower. Those are not the best savings rates for employees who want to retire comfortably, but companies may not offer a higher initial automatic rate because it would cost them more money, and some companies were just following the example presented by the IRS when it issued its auto-enrollment regulations in 1998.

Now regulators are trying to remind companies that they are not forced to limit the savings rate to 3 percent but are free to go higher. Even when companies have auto-escalation programs that increase participants' savings rate one percentage point a year to 6 percent, workers will have to save more for a comfortable retirement. Boston College's Center for Retirement Research says the government should make automatic enrollment and escalation mandatory.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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