Improving Retirement Income Security with Automatic 401(k)s
By: Source: AARP.org Date Posted: 2007-06-19 15:27:56.626029-04:00
Americans in the workforce today face an exciting but challenging "new retirement." There's the promise of longer lives and the reality that many employees many not be saving enough to see them through their retirement years.
We believe all Americans should have peace of mind about their future lifetime financial security and that one of the best ways for employees to build an adequate nest egg is to maximize saving through their 401(k)s. Having a 401(k) plan is a high value benefit for employees for a variety of reasons. The plans provide a tax effective way to save for retirement efficiently via payroll deductions, provide a clear "account balance" of savings, provide a benefit that is "portable" and can be transferred as employees change jobs, and also in most cases enable the employee to manage their investments based on their needs.
Unfortunately, a sizable percentage of those eligible to invest in 401(k)s about three out of ten employees, do not choose to participate in these programs, for a variety of reasons including:
- procrastination due to complex 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 lifetime financial security. An automatic 401(k) changes the decision-making process so that savings and investment become automatic, unless the employee chooses to do otherwise. Requiring no action on an employee's part effectively eliminates the major stumbling blocks 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, "lifecycle" funds and automatic increases in employee contribution levels are designed to overcome employees' inaction or lack of knowledge about saving and investing for retirement. These are the common barriers that 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.
Research shows that automatic enrollment can increase participation dramatically, particularly for employees least likely to save: women, minorities, and low income. One study (Madrian and Shea) shows that participation rates jumped from 35 percent to 86 percent for women; 19 percent to 75 percent for Hispanics; and 13 to 80% for low-wage earners after auto enrollment.
Surveys show employees appreciate automatic 401(k)s because they make saving easier and that individuals can start saving earlier, save more, save smarter, and worry less. As expressed by one employee at a large retail company, "I think everyone who comes to work here now is really lucky because they get signed up for the plan automatically. It's made easy for them. They can start saving money right away without really having to think much about it."
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, recently government has made it easier for companies to make the switch to automatic plans.
For working Americans and their employers the automatic 401(k) holds great promise for strengthening retirement income savings and security. However, too many Americans are worried about their retirement and their children's futures. The American Dream—living the life you choose with dignity and peace of mind—is at risk. To help combat this risk, AARP has launched a national effort called Divided We Fail to engage the American people, elected officials and the business community in finding broad-based, bi-partisan solutions to the most compelling domestic issues facing the nation—health care and the lifetime financial security of Americans.
If you or someone you know is facing these issues, please join us.
Find more information on Divided We Fail or become a Divided We Fail voter.
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