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Retirement Made Simpler News
March 26, 2010
Each issue of Retirement Made Simpler News delivers important news, research, updates and more to your inbox. Meet the Organizations
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In the News
New Research from EBRI: Low-Income Workers Likely to Benefit More Than Thought from Auto-Enrollment in 401(k) Plans
New research from the Employee Benefit Research Institute finds that auto-enrollment of participants in 401(k) plans is likely to be most beneficial to young and low-income workers, although high-income workers are likely to benefit from it as well.
Using simulations based on employee contribution data, the analysis showed that the adoption of automatic enrollment is likely to have a very significant positive impact (even greater than EBRI simulated in 2008) in generating additional retirement savings for many workers, especially for young and low-income workers: - If all 401(k) plans are assumed to be using the large plan sponsor auto-enrollment provisions, the median 401(k) accumulations for the lowest-income quartile jumps from 0.08 times final earnings, to 4.96 times final earnings (if 401(k) participants revert back to the default contribution when they change jobs) and 5.33 times final earnings (if they retain their previous contribution level when they change jobs)—a more than 60-fold increase.
- There are also large increases even for high-income workers: The multiple under a voluntary enrollment scenario is 2.41 times final earnings compared with 9.15 or 9.81 under auto-enrollment, depending on the assumptions for employee reversion to default contribution rates upon job change.
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Employee Focus—How to Make Your Company's Retirement Plan Work for You
If you've started a new job recently—or at least since 2006—you may have found that your new company automatically enrolled you in its 401(k) plan. Why 2006? Because that's when Congress passed the Pension Protection Act of 2006, which encouraged companies to automatically enroll employees in 401(k) plans and cleared up some of the legal issues surrounding the practice. Prior to this, only about 17% of all companies that offer a 401(k) enrolled employees in the plan automatically; now, about 60% do.
Study after study has shown that participation rates rise—often dramatically—when employees are automatically enrolled in retirement savings plans. "Opt out rates, in most cases, are below 10%," says Jack VanDerhei, research director at the Employee Benefits Research Institute (EBRI.org). "So that's going from the typical 40% participation rate from younger and lower-income workers to almost 90% with automatic enrollment." AOL DailyFinance
Momentum for Annuities in 401(k)s Builds
More retirement think tanks are getting on board with the idea of including annuities in 401(k) plans, but so far, only a handful of large employers have this as an option. The Retirement Security Project recommends either automatic annuitization once workers reach age 45, with the right to opt out, or moving 50% of a worker’s savings into an annuity upon retirement. Financial-Planning.com
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Success Story
The benefits team at ProAssurance, a medical liability insurance company, evaluated their 401(k) plan and realized that many of their 575 employees were not participating. Even of those who did, many did not take advantage of the five percent match that the company offered. Concerned that employees were “leaving money on the table,” the company asked their plan provider to suggest ways to address their concerns and help their employees begin to save more. Their plan provider immediately suggested an automatic 401(k), citing key benefits. Just six months after the initial meeting, ProAssurance launched its automatic 401(k) plan.
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Featured Resources
Automatic 401(k) Toolkit
The Next Generation of Automatic 401(k) Plans
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