NCPA - National Center for Policy Analysis


December 17, 2007

To help employers better understand recent trends in 401(k) design and the pros and cons of automating 401(k) participation, AARP asked Towers Perrin -- a global professional services firm -- to review the published research on 401(k) prevalence, participation and design, and to analyze Towers Perrin's own propriety data on employer and employee views of 401(k)s and other reward components.  The research team also conducted in-depth interviews with a number of U.S. companies to get an up-to-date view of employers' thinking and current approaches to enhancing 401(k) participation.

Among the key research findings:

  • Despite the continuing challenges involved in maximizing 401(k) participation, U.S. companies recognize the growing importance of 401(k) plans and are focusing increasing attention on boosting their 401(k) participation rates to address a range of key business and workforce objectives.
  • More than 60,000 U.S. employees consider competitive retirement benefits -- including a 401(k) plan -- among the top 10 considerations for today's employees in choosing an employer -- and are even more important to workers age 50+ and to employees in certain industries.
  • Employer contributions to 401(k)s typically offer a larger, positive return on investment (ROI) that can sometimes exceed the ROI for spending on other key reward elements, such as pay and bonuses.
  • This high ROI is likely due to employees increasing focus on retirement savings and security.

To maximize the employer's return on 401(k) investments, however, it's critical for employees to participate in the plan at a meaningful level of individual savings and to manage their savings carefully over time.  Adding automatic 401(k) features offers a solid payoff in this regard.  In fact, one study by the Employee Benefit Research Institute, conducted in July 2005, projects that automating 401(k) participation can bring a significant increase in retirement savings at all income levels and more than double the income replacement rate for employees in the lowest income brackets.

Source: "Enhancing 401(k) Value and Participation," Towers Perrin, June 2007.

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