Automatic 401(K) Enrollment Boosts Savings and Participation
By: Source: AARP.org Date Posted: 2007-07-23 15:25:54.879588-04:00
Marylanders in the workforce today face an exciting but challenging "new retirement." There's the promise of living longer - and for many, the unfortunate reality of not having saved enough to see those retirement years through.
One of the best ways for employees to build an adequate nest egg is to maximize saving through a 401(k) plan. Provided by many companies, these plans are a tax-effective way to save for retirement through payroll deductions. Plans offer a clear "account balance" of savings, can be transferred as employees change jobs and in most cases enable the employee to manage their investments based on needs.
Unfortunately, a sizable percentage of those eligible to invest in a 401(k) (about three out of ten employees), do not choose to participate in these programs for a variety of reasons:
- Procrastination due to the complexity of retirement savings decisions.
- Inaction resulting from a lack of investment knowledge.
- Preoccupation with work, family and other immediate demands.
The "automatic 401(k)" is a simple solution and a critical component of AARP's Divided We Fail effort to improve Americans' lifetime financial security. An automatic 401(k) changes the decision-making process so that savings and investment become automatic, unless the employee chooses to opt out. Requiring no action by the employee eliminates the major stumbling block to 401(k) participation, which means more employees save - and save more.
Automatic enrollment - along with other "auto" features such as automatic rebalancing of investments and automatic increases in employee contribution levels - are designed to overcome employees' inaction or lack of knowledge about saving and investing for retirement. These common barriers prevent some workers from getting into the 401(k) saving habit. In a sense, these features mimic the more automatic attributes of traditional pensions to help employees make prudent financial choices today to prepare for tomorrow's retirement.
Automatic enrollment can increase participation dramatically, particularly for employees least likely to save: women, minorities, and low-income workers. One study shows that participation rates jumped from 35 percent to 86 percent for women; 19 percent to 75 percent for Hispanics; and 13 percent to 80 percent for low-wage earners after auto enrollment.
Surveys show employees appreciate automatic 401(k)s because they make saving easier and help individuals start saving earlier, save more, save smarter, and worry less.
And research recently released by AARP shows benefits for employers as well, finding that, in some cases, improvements in 401(k) features have the ability to produce a higher return on investment than company investments in other, more costly compensation programs.
Automatic enrollment can clearly be a win-win situation. Employers typically experience an increase in their participation rates while employees feel more confident in their retirement readiness. And recent legislation has made it easier for companies to make the switch to automatic plans.
For working Marylanders and their employers the automatic 401(k) holds great promise for strengthening retirement income savings and security. AARP in Maryland is reaching out to business owners, human resources managers and employers offering 401(k) plans with information on the benefits of introducing automatic enrollment. To learn more about helping your workers maximize their retirement savings the easy way, please call 410-895-7614 or e-mail.
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