Automatic 401(k) Enrollment Helps Workers Maximize Savings

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Texans in the workforce today face an exciting, but challenging "new" retirement. On the up-side there is the promise of living longer. Many others face the unfortunate reality that their savings might not be enough to see them comfortably through their retirement years. With traditional pension plans disappearing, people find it difficult to save, and many retirees must depend solely on Social Security.
 
AARP believes that all Americans should have peace of mind about their future financial security, and one of the best ways for employees to build a retirement nest egg is to participate and maximize savings through a 401 (k) plan.  These plans are provided by employers and often include a company "match" to the dollars saved by workers.  This is a tax-effective way to save for retirement through payroll deductions. Unfortunately, a sizable percentage of those eligible to invest in 401 (k) plans (about 3 out of 10) chose not to participate for a variety of reasons:

• Procrastination because of the complex savings decision needed.
• Preoccupation with other immediate demands.
• Inaction resulting from a lack of financial literacy.

By automating enrollment in 401(k) plans, many of the barriers to participation are eliminated. An automatic 401(k) changes the decision making process to facilitate new employees’ participation in the savings and investment process from day one. Under this plan, employees must choose to opt out to discontinue participation. 

By requiring no initial action from the employee, participation goes up and employees save more. Automatic enrollment, along with other automated processes that cover investment rebalancing and increases in worker contribution levels, are designed to overcome employee inaction or lack of knowledge about saving and investing for retirement.
 
Automatic enrollment can dramatically increase saving, particularly for those 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-income workers after their companies adopted auto enrollment.
 
Automatic enrollment can clearly be a win-win for both employers and employees. Employers typically experience an increase in participation rates while employees feel more confident in their retirement readiness. "Auto 401(k) plans are a powerful, cost effective way for businesses to give their employees a savings boost," said AARP Texas State President, Gus Cardenas. "At the same time, businesses gain a valuable recruitment and retention tool."
 
For working Texans and their employers, the automatic 401(k) holds great promise for strengthening retirement income savings and security. AARP Texas is reaching out to business owners, human resource managers and employers that offer 401(k) plans with information on the benefits of automatic enrollment.

For more detailed information about the benefits of Automatic 401(k) plans, see How to Implement an Automatic 401(k) Plan and Increase Employee Contributions.

Also, you may view Auto 401(k) plans Generate a Positive Return for Employers, Employees.

For more information on AARP Texas' automatic 401(k) outreach efforts to employers, please call 800-227-7443.