Employers make saving easier with 401(k) plans

Enhancing 401(k) plans with an automatic feature can generate a double-barreled investment success, helping workers to save more for retirement while generating positive benefits for employers as well.

by David Mitchell — 

For many people, saving for retirement can be as hard as quitting smoking or losing weight — but the good news is that it doesn’t have to be. In a new report, “Enhancing 401(k) Value and Participation: Taking the Automatic Approach,” prepared by Towers Perrin for AARP, research shows that enhancing 401(k) programs with automatic features helps workers save more for retirement while helping employers recruit and retain employees.

As traditional pensions continue to decline, 401(k) plans become increasingly important to our retirement security. However, a sizeable percentage (about 30 percent) of those eligible to participate in their workplace 401(k) programs simply choose not to. Research also shows that many who do not contribute to an employer-sponsored savings program do not save enough to meet their retirement income needs. Failing to participate in an employer-matched program means passing up a savings opportunity and leaving employer dollars on the table.

Employers are concerned about low levels of 401(k) participation and the need to make these plans more valuable to employees. This concern prompted the passage of the Pension Protection Act of 2006, which now allows employers to automatically enroll their employees into a 401(k) plan with default contribution levels. What this means is that employees are instantly enrolled in a plan at the minimum contribution level as soon as they become eligible. Employees working for companies who implement this plan will need to opt out of the 401(k) if they don’t want to utilize the plan.

Automatic enrollment — along with other “auto” features such as automatic rebalancing of investments, automatic increases in employee contribution levels, and even auto-investing into prudent default investments such as balanced or lifecycle funds — is designed to overcome employees’ inertia or lack of knowledge about saving and investing for retirement.

Enhancing 401(k) plans with an automatic feature can generate a double-barreled investment success, helping workers to save more for retirement while generating positive benefits for employers as well.

For more information on the Pension Protection Act of 2006, visit: http://www.dol.gov/EBSA/pensionreform.html.

David Mitchell is state director of AARP Arizona. 866-389-5649 or www.aarp.org.

Reprinted from AzNetNews, Volume 26, Number 4, August/September 2007.