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Enhancing 401(k) Value and Participation: Taking the Automatic Approach

Concerns about low levels of 401(k) participation and the need to make these plans more valuable to support a range of workforce goals have prompted some employers to enhance their plans by adding automatic features, such as automatic enrollment, escalation, rebalancing of investments, and "lifecycle" funds. To help employers better understand recent trends in 401(k) design and the pros and cons of automating 401(k) features, AARP commissioned Towers Perrin to prepare this 2007 report focused on midsize and large U.S. companies.

Key findings include:

  • U.S. companies recognize the growing importance of 401(k) plans and are focusing increased attention on boosting their 401(k) participation rates to address a range of key business and workforce objectives.
  • U.S. employees show growing awareness of the pivotal role that 401(k) plans play in their total reward package.
  • Employer contributions to 401(k)s typically offer a larger, positive return on investment (ROI) that can sometimes exceed the ROI for spending on other key reward elements, such as pay and bonuses.
  • To maximize the employer's return on 401(k) investments, it is critical for employees to participate in the plan at a meaningful level of individual savings and to manage their savings carefully over time. Adding automatic 401(k) features offers a solid payoff in this regard.

For this study, Towers Perrin reviewed published research and analyzed its own propriety data on employer and employee views of 401(k) and other reward components, and also conducted in-depth interviews with 12 U.S. companies. For more information, contact Colette Thayer at 202-434-6294. (21 pages)