Employers Are Taking the Reins of Retirement Savings
Everyone knows Americans hate saving for retirement.
In fact, new numbers from Bankrate show 10% have not saved a dime for retirement in the last two years — and fewer than one in five American workers are saving more for retirement now than they were in 2014.
Now employers are looking for ways to cut through that apathy, automatically enrolling workers into employer-sponsored retirement plans like 401(k)s. A Towers Watson report showed automatic enrollment in defined contribution plans is now practically commonplace among large and midsized businesses — however, retirement experts say the missing element is that while enrollment is automated, increased contribution is not.
Mel Hooker, head of relationship management at Wells Fargo Institutional Retirement and Trust, said the upside as far as automated retirement plan enrollment is concerned is that in his company’s analysis, only 11% of these automatically enrolled employees opt out.
“This makes a very strong case for the effectiveness of automatic enrollment in getting people to participate in their plan, which is a critical first step toward saving enough for retirement,” Hooker said.
However, the challenge lies in getting participants in these types of plans to contribute enough money to be on track for the 80% pay replacement they need in retirement.
“The downside is that most plans with auto enroll still don’t have a high enough default deferral rate for participants to have an adequate income replacement in retirement,” said Hooker.
He said a typical match formula for plans with auto enroll should require a participant to defer 6 or 7% to reach a total contribution rate of 10% — but only 7.2% of plans with auto enroll on Wells Fargo’s books have a default rate of 6% or higher.
"Studies show that auto-enrollment increases the number of employees in defined contribution plans,” said Susan Conrad, director of retirement plan advisors for Plancorp in St. Louis. “That is good news but it is not the entire story. Employees auto enrolled are less likely to engage and therefore generally remain at the auto enrollment percentage.”
Conrad agreed if this percentage is low, the participant is most likely not saving the amount needed to replace their income at retirement. She said employers should consider setting the initial auto enrollment percentage at 6 or 8%. She added auto-enrolled employees are generally invested in the default investment alternative, and while the default is often a balance fund investing in stocks and bonds, the risk tolerance might be more conservative than the employee would select.
Another option employers could start to use to make sure their employees are ready for their golden years are automatic increasing contributions, said Stephen Rischall, co-founder of 1080 Financial Group in Los Angeles.
“Automatic increasing contributions are a great feature and more plans should adopt this,” Rischall said. “By simply increasing employee contributions automatically by as little as 1% per year, participants ultimately end up saving more for their retirement.”
Rischall said often times these small increases go unnoticed, and by doing it periodically participants have time to adjust their spending habits. Also, because it takes an action to opt out of automatic increasing contributions, most participants just let it be, he added.
However, while having everything automated can be easy on the mind, if people want to be properly prepared for retirement, the best route — just as in most things — is through education.
"If employee education meetings are an option, we prefer to educate employees regarding the savings amount needed today in order to replace their income at retirement,” Conrad said.
“Employees engaged in this process defer at a higher percentage and are engaged in the investment selection process,” she said. “If employee education meetings are not feasible however, auto enrollment with auto escalation is the most effective feature to increase savings."