Pension Protection Act Report Card, 5 Years Later

401(k) auto-enrollment hasn’t worked out quite as planned

Five years after sweeping legislation altered the landscape for retirement savers, more workers are participating in 401(k)s and other workplace-savings plans. Success? Not so fast, critics say: Workers aren't necessarily better prepared for retirement than they were back in 2006.

SmartMoneyreports on the small provision in the Pension Protection Act of 2006 that allows companies to "auto-enroll" employees in a 401(k). The goal, according to the authors, was to use employee inertia in their favor, and according to some data, that's worked: 82% of employees in companies with auto-enrollment participate in their 401(k) plan, compared to just 56% of workers at firms without the program, according to data from Fidelity Investments. Almost 60% of large companies now use the feature – more than double the number that did before the legislation was passed.

And yet the magazine notes most investors are still woefully behind when it comes to retirement savings. In 2009, the average 401(k) was about $110,000, according to the most recent available data from the Employee Benefit Research Institute – down from $121,000 in 2006. Financial planners and advisors agree that that amount of savings would likely only generate income of $4,000 to $6,000 a year in retirement – not enough for most to continue their pre-retirement lifestyles. More than half of workers are in even worse financial shape, with less than $25,000 saved, according to a March EBRI survey.

Part of the problem, according to experts interviewed for the article, is that auto-enrollment programs typically only enlist new workers, meaning large parts of the existing workforces still aren't participating. Only about 20% of companies automatically enroll existing employees, SmartMoney quotes Marina Edwards, senior retirement consultant Towers Watson, as saying. Auto-enrolled people on average sock away less than those who enroll on their own. Consider: Participants in plans with 401(k) plans offered by Vanguard with voluntary enrollment were saving an average of 7.5% in 2009, compared to just 6.1% for those in automatically enrolled plans.

Some experts are also critical of the investment funds that are selected for these passive investors. Some 90% of plans put new investors in target-date funds–premixed portfolios of stocks and bonds that are designed to get more conservative as a projected retirement (or target) date gets closer. But these funds "remain controversial," Jack VanDerhei, research director at the nonprofit Employee Benefit Research Institute, told the publication.

For their part, the fund companies defended the portfolios at the time as appropriate for savers planning for what could be 30 years of retirement or more. And the Department of Labor deliberately excluded lower-risk, lower-return investments, like money market funds or stable value funds, from its list of acceptable default options, favoring funds with stock market exposure instead.

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