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Auto-Features in 401(k)s May Foster Delusions of Preparedness

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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%.

That is so not enough.

It’s now recommended that people save at least 15% of their income, while some experts are going farther out on a limb to recommend 18% or even 20%.

But that isn’t happening, and indeed the auto-features could be encouraging people to take a similar hands-off attitude toward their 401(k)s that they once took with pension plans.

From a psychological standpoint, the article says, this is very dangerous: “Psychologists know only too well how easy it is for us to procrastinate, form overly rosy images about the future, buy impulsively, overspend, make bad spending decisions, and so on. What is more, emergencies today, whether they are medical or personal (divorce, job loss, etc.) can devastate personal finances. The upshot is that it is very difficult for many people to save adequately for their retirement.”

And what’s happening is that auto-features in a plan “may create the illusion that one’s retirement is taken care of, making people falsely complacent and unprepared,” as well as encouraging passivity in personal finances—and people are already reluctant enough to take the time and effort to learn about investments and understand exactly how investing and retirement plans work.

Automatic features are good for boosting enrollment and savings rates, but they’re not enough to prepare people for retirement or to get them actively engaged in their own financial futures. People tend to view them as a solution, instead of only part of a complete approach to retirement savings.

— Check out Retirement Saving Checklist: 15 Things to Know That Can Lead to Success on ThinkAdvisor.


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