Last week we learned that many U.S. households are not on track for a financially secure retirement. One potential way to address this problem is to provide more working Americans with access to an employer-sponsored retirement savings plan, such as a tax-advantaged 401(k). Encouragingly, a new report from Wells Fargo found that plan participation among the 4 million U.S. workers eligible for such employer-provided retirement benefits that the researchers examined jumped by 19 percent over the past five years. Increases were seen across all demographic groups but the most pronounced gains were found among younger, less-tenured workers with lower annual incomes. A big factor behind this is the rise of automatic enrollment, which sweeps newly-hired employees, increasingly at the start of their career, into a 401(k) or similar savings vehicle. Moreover, the researchers found that the average participation rate for plans with automatic enrollment was above 80 percent, while plans without this feature mostly had a level of participation below 50 percent. One noteworthy risk associated with automatic enrollment is that participants never raise their routine plan contributions above the default rate, which is typically around 3 percent. Many financial experts believe that this is not sufficient for achieving a comfortable retirement, especially for individuals who do not begin saving until later on in life.
Fortunately, lots of sponsors have already started raising participants’ contributions automatically, and various surveys have revealed that many more employers intend to incorporate auto-escalation into their plan design at some point in the future. Such initiatives are likely to be successful because the Wells Fargo researchers found that the average opt-out rate for plans with a 6 percent default contribution level was just 11.4 percent, a modest increase from the already low 10.3 percent opt-out rate found among plans with the more common 3 percent starting contribution level. Automatic enrollment and auto-escalation, though, are not the only plan features that affect participants’ behavior. For example, the report’s authors found evidence that an employer’s level of matching contribution can have a significant effect on eligible employees’ willingness to participate in a workplace-provided retirement plan (see below), as well as how much they ultimately decide to contribute to the plan on a regular basis. It is also worth mentioning that ensuring a financially secure retirement entails more than just routinely setting money aside. A plan participant’s savings, for instance, need to grow over time and one efficient way to achieve this is with the use of a diversified investment portfolio. Proper diversification, though, can be a confusing topic for many investors but fortunately it is something that more plan participants from all income groups are now able to enjoy. Specifically, the Wells Fargo study found that 82 percent of participants on the lower end of the income scale had an age-appropriate level of portfolio diversification, compared to 78 percent for higher income individuals. Automatic enrollment is again a factor here because many younger and less tenured employees are now being defaulted into their plan’s Qualified Default Investment Alternative (QDIA), e.g. a lifecycle or target date fund (TDF). Consulting with a professional financial advisor can also be quite helpful when trying to put together a mix of investment assets that is appropriate for a person’s age and unique risk appetite.
Sources: Wells Fargo, Think AdvisorPost author: Charles Couch