Researchers: Automate 401(k) Enrollment

Automatically enrolling new workers in 401(k) plans can increase 401(k) plan balances significantly, and lower income workers appear to benefit the most.[@@]

Sarah Holden of the Investment Company Institute, Washington, and Jack VanDerhei of the Employee Benefit Research Institute, Washington, today published those conclusions in an analysis of automatic enrollment efforts. The analysis was released by the ICI and EBRI.

“The default contribution rates and investment options set by employers who offer 401(k) plans with automatic enrollment can have a significant impact on participants’ 401(k) accumulations at retirement,” Holden and VanDerhei write in their analysis.

The researchers also find that current 401(k) plan members’ ability to save for retirement depends heavily on whether they will continue to work for employers that sponsor 401(k) plans.

The researchers look, for example, at low-income participants who are now between the ages of 26 and 35. If future 401(k) coverage is random, then only half of those workers will collect enough retirement benefits to replace more than 25% of their current incomes when they turn 65, the researchers predict.

If, however, the young, low-income participants stayed in 401(k) plans until they turned 65, the median income replacement rate at retirement would be 51%, the researchers predict.

The impact of automatic enrollment on higher income groups would be less dramatic because higher-income workers already tend to have higher 401(k) participation rates, the researchers write.

“In addition, higher income workers tend to contribute more of their income [to] a 401(k) retirement savings plan and place it in more aggressive investments than is typically the case through automatic enrollment,” the researchers write.