NCPA - National Center for Policy Analysis

TAKING THE GUESSWORK OUT OF 401K PLANS

July 22, 2005

Companies are taking a more active role in getting their employees to participate in 401(k) plans, as well as helping them to invest in higher-return funds, says the Wall Street Journal.

Fears of lawsuits by workers angered over their fund performances have prompted many firms to implement automatic enrollment features, which force employees to "opt out" if they don't wish to participate.

  • Some 20 percent of large companies automatically enroll their employees, up from 14 percent for most of the decade.
  • Between 2 and 6 percent of an employee's paycheck is automatically deposited into an account.
  • About 10 percent of companies offer automatic savings escalation, which raises contribution rates as pay increases, and another 10 percent plan on adding it soon; Dutch firm Getronics NV automatically increases worker contributions 1 percent each year.
  • Almost 40 percent of companies default their employees into premixed funds, an increase from 30 percent in 2003.

Currently, 75 percent of employees invest in their company's 401(k) plan. For large companies, only two-thirds of employees enroll in 401(k) plans. The number drops to 30 to 40 percent for new hires. According to the National Center for Policy Analysis, most employees don't save enough, and often choose inappropriate investment allocations when they do.

Historically, employees have had to "opt in" to retirement plans and decide how much to save and where to allocate their contributions. But companies hope that automating the process will get more employees to take advantage of 401(k) plans, especially younger workers, who often lack the time and inclination to invest.

Source: Jeff P. Opdyke, "Retirement Plans Go Automatic," Wall Street Journal, July 20, 2005; and John C. Goodman and Peter R. Orszag, "Retirement Savings Reforms on which the Left and the Right Can Agree," National Center for Policy Analysis, Brief Analysis Nor. 495, December 1, 2004.

For text (subscription required):

http://online.wsj.com/article/0,,SB112181523657190128,00.html

For NCPA text:

http://www.ncpa.org/pub/ba495/

 

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