The 401(k) Features Employers Can No Longer Ignore

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Auto enrollment and other automatic features get a thumbs up from workers struggling to save.

Employers still riding the fence on automatic enrollment in 401(k) plans need look no further than a new report from J.P. Morgan Asset Management. The report finds that virtually all participants in such programs are satisfied, and that a fair number would never have enrolled on their own.

The same pattern holds for those in plans where their contributions are automatically raised by 1% or 2% of pay each year. It also holds for those who went through automatic re-enrollment and in the process saw their assets shifted to a default target-date mutual fund.

Many companies have adopted auto enrollment, auto re-enrollment, and the auto escalation of employee contributions. Among companies with a 401(k) plan, 70% have some kind of auto feature, reports benefits consultant Aon Hewitt. Bank of America Merrill Lynch found that plans with auto enrollment had 32% more participants, and those with an auto escalation feature had 46% more participants increasing their contributions each year.

Key findings from J.P. Morgan:

  • Among those automatically enrolled in their 401(k) plans, only 1% opted out and 96% were happy with the feature. Nearly a third said they would not have enrolled otherwise.
  • Among those whose contributions were automatically increased each year, 97% were satisfied and 15% said they were not likely to have increased contributions on their own.
  • Among those who went through a re-enrollment, 73% allowed their assets to be moved to a target-date fund. A stunning 99% were satisfied with their new investment.

A key reason holdout companies give for not instituting auto features is “anticipation of employee pushback,” the J.P. Morgan report states. But these results should wipe out any lingering concerns. Among all workers, three quarters have a neutral or positive view of auto enrollment and auto escalation of contributions, J.P. Morgan found. Two-thirds had a neutral or positive view of combining the two in one plan. One reason for the broad acceptance: the immense popularity of target-date funds, the age-based all-in-one funds which are the default investment option in many plans. Some 90% of workers find target-date funds appealing, J.P. Morgan found.

Embracing auto features speaks to a broad recognition among workers that they are not comfortable managing their own investments. They are unsure how much to save and where to put the money. Some 81% of plan participants say they are interested in retirement planning and yet only 45% have a plan, J.P. Morgan found. Some 68% know they are not saving enough.

Auto enrollment gets you started. Auto escalation can help get you to an appropriate contribution rate over time. Target-date funds keep you diversified and in age-appropriate asset classes. These features are proving to be a critical part of the evolution of 401(k) plans, and there is no longer a case for not including them.

Posted in Columns on July, 2016

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Dan Kadlec is the founder and editor of Right About Money, a media platform that powers financial literacy. Right About Money informs global thought leaders, policymakers, and educators about trends in financial education, and advances their understanding of how best to boost personal money skills. At Right About Money, we...

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