Automatic 401(k) Enrollment Not Boosting Savings

July 8, 2011

A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people, says the Wall Street Journal.

Under the law, companies are allowed to automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own.  The measure was intended to encourage more people to bulk up their retirement nest eggs.

  • But an analysis done for the Wall Street Journal by the Employee Benefit Research Institute (EBRI) shows about 40 percent of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily.
  • EBRI performed a complex computer simulation of savings patterns drawing on data from more than 20 million 401(k) participants.
  • The problem: More than two-thirds of companies set contribution rates at 3 percent of salary or less, unless an employee chooses otherwise.
  • That's far below the 5 percent to 10 percent rates participants typically elect when left to their own devices.

Some auto-enrollment programs have "auto-escalation" features that increase employee savings rates by a set amount, typically one percentage point a year, until they reach a certain threshold.  Even this might not be enough: An October study by EBRI and the Defined Contribution Institutional Investment Association found that, depending on their incomes, 54 percent to 73 percent of employees would fall short of amassing enough money to retire if they enrolled in their companies' 401(k) plans at the default-contribution rate and were auto-escalated by 1 percent a year to a maximum of 6 percent.

EBRI notes in a blog post that the Journal article fails to mention that auto-enrollment is increasing savings for some groups, especially the lowest income 401(k) participants.

Source: Anne Tergesen, "401(k) Law Suppresses Saving for Retirement," Wall Street Journal, July 7, 2011.

For text:

http://online.wsj.com/article/SB10001424052702303365804576430153643522780.html?mod=WSJ_newsreel_business  

For EBRI rebuttal:

https://ebriorg.wordpress.com/2011/07/07/what-do-you-call-a-glass-that-is-60%e2%88%9285-full/

 

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