It’s not enough to put in automatic features in retirement plans if those features don’t push people into saving at a high enough rate, or to take an active role in choosing investments for their account.
That’s according to a report in Psychology Today, which says that in fact automatic features may be deceiving participants into thinking that their retirement is taken care of, in the way a defined benefit pension once took care of the monthly income needs of retirees.
However, the opposite is true — and in fact people often completely lose sight of the fact that they are fully responsible for the outcome of their retirement savings, while that was not the case for pension plans.
Auto-features have resulted in more people saving for retirement, but they’re not saving enough.
A Vanguard report says that, of its customers enrolled in an automatic savings plan, 52% were in a program that only saved 3%, while another 28% had savings rates of 4–5% and only 20% had a savings rate of 6% or greater.
While Vanguard did not specify how many participants were saving 15% or more, the report says that “it was likely a fraction of 20%.”
And the average Vanguard customer saved just 6.2% of their income, with a median saving rate of 5% in 2016. Says the report, “Interestingly, these numbers were lower than any time since 2007, and Vanguard attributed the declines to an ‘increase in automatic enrollment.’”
In another report, Wells Fargo found that fewer than 40% of individuals automatically enrolled in its savings plan have a savings rate of 10% or more. In yet another report, Alight Solutions found in its 2017 survey of large employers that 37% of employers provided a default savings rate of 3%, and another 30% have a rate of 6%.