Most workers want to save for retirement, but many never get around to doing it. Automatic 401(k) plans address this problem by making it easy. Rather than asking workers to sign up, employees are automatically enrolled unless they decide to opt out, which they can do at anytime. Research shows that this strategy works—raising participation rates to 85 percent or more—and it’s one of the simplest things employers can do to help employees save for retirement.
Employers benefit, too. In a recent study by AARP on employer attitudes about automatic 401(k) plans, almost half said it’s easier to pass nondiscrimination testing with these features, and more than a third said it demonstrates social responsibility. Implementing automatic 401(k) plans can also help the bottom line by reducing plan pricing or plan provider fees. These factors are among the many reasons that help explain why adoption of automatic features is on the rise: according to a survey by the Profit Sharing Council of America, almost 40 percent of all company plans offer automatic enrollment, up from 24 percent in 2006.
In addition, 36 percent of those plans with automatic enrollment also had an automatic escalation feature, which increases an employee’s savings rate each year. Automatic escalation helps employees stay on pace to save the 10 percent or more financial professionals estimate they will need to fund a secure retirement.
What about those companies that are not offering automatic features? In the AARP survey, employers most frequently cited employee-related challenges such as a concern that employees would not like automatic enrollment (30 percent) as the major reason for not implementing automatic features.
That concern may be misplaced. Case in point: the Mandarin Oriental Hotel Group introduced automatic 401(k) enrollment in 2006 for all employees. Despite anticipating some employee push back, especially from those who had not previously enrolled in the plan, automatic enrollment has been received extremely well throughout the organization. In addition, enrollment increased from 40 percent to 86 percent, and Mandarin Oriental passed nondiscrimination tests at all locations. Both results are helping Mandarin Oriental to retain valuable employees.
Nationwide, one of the largest insurance and financial services companies in the United States, also saw positive impacts from implementing automatic 401(k) features. When it began offering automatic enrollment in the employee 401(k) plan in 2007, participation rates jumped from less than 75 percent to 95 percent. Last year, Nationwide aimed to foster an even stronger savings culture by increasing the default enrollment percentage from 3 percent to 4 percent of pay and raising the maximum contribution amount in the automatic increase provisions from 6 percent to 12 percent for all employees.
"With the downturn in the economy, many companies suspended their 401(k) match, froze their pension plan or terminated retiree-healthcare benefits," noted Bob Puccio, senior vice president of associate services at Nationwide. "Nationwide demonstrated its commitment to retirement preparation in part by enhancing the automatic-enrollment and automatic-increase features in their 401(k) plans."
John Gannon, senior vice president of FINRA, a founding partner of the Retirement Made Simpler coalition, said, “I would encourage companies with concerns about adding new or enhanced automatic features to talk with other companies that have taken these important steps, especially if they want to hear about employee reactions. Most employees that participated in a 401(k) plan with these features describe the experience as overwhelmingly positive.”
Saving for retirement is more important than ever, especially with increasing longevity, greater potential for chronic illness in later years and periods of economic uncertainty. By adopting automatic features such as automatic enrollment and automatic escalation in their 401(k) plans, employers can help their employees effectively prepare for retirement.
David John is Deputy Director of the Retirement Security Project a founding member of Retirement Made Simpler, a coalition founded by AARP, the Financial Industry Regulatory Authority (FINRA), and the Retirement Security Project (RSP), to promote retirement savings for employees.