Last week we learned that even though Americans seem to understand the importance of saving for retirement, many are still not doing enough to ensure a comfortable and financially secure lifestyle in old age. Employers can help address this problem through the use of automatic enrollment, a plan feature that forces workers to be more prudent with their retirement preparations.
Specifically, employers can automatically deduct elective deferrals from an employee’s wages unless the employee makes an election not to contribute or to contribute a different amount, according to the Internal Revenue Service (IRS). Auto-enrollment is effective because people are very unlikely to opt-out of a retirement savings plan after being “nudged” into participating. In fact, behavioral economics research has demonstrated that on average only around one in ten workers actually opt out of a plan after being automatically enrolled.
Encouragingly, a growing number of employers have incorporated automatic enrollment into their plan design. Just look at the new study from T. Rowe Price, which found that 54.5 percent of eligible plans in 2016 were using auto-enrollment, a significant increase from 39.8 percent in 2011. Even better, 71.5 percent of plans at the end of last year had also incorporated some form of automatic escalation, which increases participants’ contribution rates on a periodic basis.
Auto-escalation is useful because most sponsors still start participants off at a relatively low contribution rate that few individuals would raise on their own. Sixty-six percent of participants were found to continue with annual deferral rate increases when automatically enrolled in such a service, compared to just 12 percent for voluntary enrollment. However, only 39 percent of plans have implemented the use auto-escalation as an opt-out feature, suggesting that there is still a lot of room left for improvement.
Sources: T. Rowe PricePost author: Charles Couch