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Employers are increasingly saving retirement money on autopilot for their workers.
About 62% of businesses with 401(k) plans used automatic enrollment in 2020, up from 60% the year before and 46% a decade ago, according to the American Council on Plan Patrons. , a trade group.
This feature allows employers to roll over a portion of an employee’s wages into a 401(k), either immediately or after a few months, if the worker does not voluntarily sign up.
The automatic check-in feature leverages worker behavior (in this case, inertia) to their advantage. Workers receive a paper or digital notice ahead of time and can opt out – but most don’t.
Vanguard Group, one of the largest 401(k) providers, establish that 92% of new employees are still saving on a 401(k) plan three years after being automatically enrolled; of the plans with voluntary subscriptions, only 29% still save.
Companies are also ramping up automatic savings rates for workers, to help them build a bigger nest.
Last year marked the first time that many employers used the “postponement” rate of 6% instead of 3%, the most common rate. (This is the part of the worker’s salary that is automatically saved.)
One-third of businesses with 401(k) plans chose 6% in 2020, while 29% used that lower rate, according to the American Council on Plan Funding.
“I think there’s only one recognition that 3% is not going to get us where we need to be in the long run,” said Hattie Greenan, research director at the American Council of Plan Sponsors.
Automation
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Increased automation comes as Americans take on more personal responsibility for their retirement savings than previous generations. Life expectancy is gradually increasing, which means that a nesting egg has to stay in the family for a longer time. Nearly half of Americans think their retirement savings aren’t going in the right direction, follow for the Federal Reserve.
Businesses also have an incentive to save for retirement. Financial security can mean greater productivity at work; it can also mean retiring earlier, which can equate to employers saving for health care benefits that, for example, often become more expensive with age.
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Ten states have also created “auto IRA” programs, according to the Georgetown University Retirement Initiative Center. These require employers to automatically enroll workers in individual state-managed retirement accounts if they do not offer a 401(k) or other workplace retirement plan.
(Four states — California, Connecticut, Illinois, and Oregon — are currently active; Maryland and New Jersey are expected to launch their programs in 2022, according to the Center.)
Financial planners and retirement service companies in general introduce people save at least 15% of their gross salary each year for retirement. (That total includes a 401(k) recruiter match.)
Research shows that increasing employee deferral rates (for example, to 6% instead of 3%) often doesn’t cause workers to abandon 401(k) plans due to lower take-home pay.
About 85% of workers earning between $15,000 and $30,000 a year participate in their 401(k) regardless of whether they’re automatically enrolled at 2% or 6%, according to Vanguard.
However, the company notes that 6% is likely not a sufficient savings rate for most workers unless the employer also has a “very generous” fit.
Employers have also automated other aspects of the plan to help increase savings rates and overall 401(k) engagement. Nearly 79% of plans with automatic subscriptions also use “auto-report,” a feature that gradually increases an employee’s savings rate over time, usually once a year, and up to the maximum rate. multi. That percentage has increased from 75% in 2019 and 68% five years ago.
Most plans cap the rate at 10%, but there has been a shift toward a higher rate, according to the Plan Funding Council of America. Some employers may also automatically “scan” all of their 401(k) nonparticipating employees each year, with the goal of keeping more workers on the plan over time.
