From the November 2010 issue of Investment Advisor • Subscribe!

Automatic Enrollment in 401(k) Plans Increases Savings Success

Greatest impact among workers with low salaries, account balances

Maybe the debate is finally over. A report released in early October by Financial Engines found automatic enrollment features for 401(k) plans fare better than plans without them. The independent registered investment advisory firm analyzed 2.8 million 401(k) participant portfolios from 272 large plan sponsors to study expected retirement income, risk and diversification status, and participant savings rates.

Three-quarters of 401(k) participants are not on track to retire comfortably by age 65, the report found. Over one-third are taking on too much risk in their portfolios, 23% are holding too much of their own company’s stock, and 39% aren’t contributing enough to their 401(k)s to take advantage of their employers’ full match.

Just 12% of participants can expect to replace 70% of their pre-retirement income in retirement.

In plans with automatic enrollment, though, there’s a different story. Nearly 40% of participants in plans with qualified default investment alternatives have an appropriate level of risk and diversification in their portfolios, compared with just 27% of participants in plans without QDIAs.

Automatic enrollment features have the greatest impact among young participants with lower salaries and account balances, according to the report. Among plans with qualified default investment alternatives, over half of participants under 30, and 52% of participants with account balances less than $5,000 have well-diversified accounts. Half of participants who earn less than $25,000 per year have well-diversified plans.

Furthermore, automatically re-enrolling new and existing participants nearly doubled the number of participants with healthy accounts.  

While automatic enrollment has been especially successful among younger workers, saving rates for that group have dropped more than any other. Among participants under 30, 53% aren’t saving enough to take full advantage of their employers’ match, and 44% of participants in their 30s aren’t saving enough. Participants earning between $25,000 and $75,000 have lower contribution rates than they did two years ago.

Another automatic feature that has been successful is automatically escalating the savings rate each year. Over one-third of participants in plans with this feature save enough to receive their employers’ full match, compared with 52% of participants who have plans with automatic enrollment, but not automatic escalation.

Unsurprisingly, the recession led to lower savings rates among participants, when compared with 2007 data. Almost 40% of participants in the 2010 survey were not saving enough to qualify for their employers’ full match, up from 33% in the 2008 report. Just 6% are saving within $500 of their annual pre-tax IRS limits.    

Danielle Andrus can be reached at dandrus@investmentadvisor.com.

Reprints Discuss this story
This is where the comments go.