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.