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Automatic 401(k) Enrollment Depresses Overall Savings Rate


In the wake of the Pension Protection Act of 2006, the number of companies that automatically enroll new employees in their 401(k) plans has risen dramatically. About 57% of large companies now do so, up from 24% in 2006, according to Aon Hewitt.

Although employees are free to opt out, few do. As a result, companies that auto-enroll report average participation rates above 85%, compared with 67% for those without auto-enrollment, Aon Hewitt says.

But the trend is actually having a depressing affect on the overall savings rates of 401(k) participants, according to 401(k) plan record-keepers, The Vanguard Group and Aon Hewitt. (Vanguard is quoted to that effect in a recent article in the Wall Street Journal on this topic.)

The reason: More than two-thirds of companies set default contribution rates under auto-enrollment at 3% of salary or less. That’s far below the 5% to 10% rates participants typically elect when left to their own devices. (Employees who are auto-enrolled are free to raise their contribution rates—or drop out of these plans entirely. But many tend to stick at the default contribution rate, either temporarily or permanently.)

It is even farther below the savings rates that Vanguard, for one, estimates are necessary to ensure a secure retirement.

According to page 35 of “How America Saves 2011: A Report on Vanguard 2010 defined contribution plan data,” those with incomes below $50,000 should save 9% of salary or more, a number that includes a company match; those with incomes between $10,000 and $100,000 should save 12% or more; and those with incomes above $100,000 should save 15% or more. The reason for the range: Social Security replaces a greater portion of income for individuals in the lower brackets.

“While automatic enrollment gets more people into the plans, it doesn’t help get them to an adequate level of savings,” says Stephen Utkus, director of the Vanguard Center for Retirement Research.

In response, companies that administer 401(k) plans—including Aon Hewitt, Fidelity Investments, The Principal Financial Group, and Vanguard—say they are pushing employers to raise initial contribution rates under auto-enrollment to 6% or more. Many are also promoting so-called auto-escalation programs. Under these, employers automatically increase participants’ savings rates—typically, by one percentage point per year until deferrals reach a specific threshold that’s generally between 6% and 10% of pay. But while a large fraction of automated 401(k) plans have such programs, most require employees to enlist voluntarily—something few do.


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    • This is a great article about the pros and cons of 401(k) company plans. The key is to be diversified and move some of your money into tax-free territory with an IRA. I decided to do that a year ago with an Ed Slott-trained advisor, and it has reap the benefits. You can start getting educated about this process by reading Ed Slott’s blog at

    • Absolutely! I don’t want to be tied into a system that doesn’t allow me access to my money until I am 62 years old. If I want to leave I’m screwed at least 20%. If I want to invest in commodities? Good luck! 98% of all mutual funds UNDER PERFORM the market by 15-25%. So why would I want a mutual fund? Why wouldn’t I just want indexes? It’s a whole racket! Keep your under performance, I’ll buy indexes and over time my retirement fund will BLOW yours away!

    • I see “companies that auto-enroll report average participation rates above 85%, compared with 67% for those without auto-enrollment”, as a great trend. The system appears to be teaching 18% (85-67) more people how to save money for a rainy day. I am not a fan of raising the initial contribution rate, but do support auto-escalation options and diversity of choice options like Roth 401k and other after-tax private sector stock options. I would also like some stock (i.e. retirement fund) options for employee whenever their company is bought/sold or CEO changes.

    • The 401k system is the way the govt. helped perpetuate the economic fraud on wallstreet. Savings from retirees was what built up a good chunk of the dow. When all those people retire and pull money out. Who will replenish that money if the economy sucks and the incoming generation cannot do it. As the title suggest, automatic. only a matter of time before minimum savings rates are instituted with no opt out. A better idea is to totally avoid any and all govt. interference. Roth 401, it isn’t any better because you are still bound by most of the same rules. That tax implication is the hook to get everyone on board propping up their paper market. You are still bound and illiquid. Land of the meek, home of the slaves.

    • To cover the government shortfall of income, tax rates will have to go up. 401K is not a good idea anymore. Save after tax money. Pay tax now. Tax is on sale. You never know what the tax rates will be by the time you retire. Government can find other ways to confiscate your retirement savings as well!

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  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.