Automatic enrollment is changing the way America saves

There’s good news for company 401(k) plans – employees are taking advantage of them. However, certain kinds of plans appeal to workers more than others

Automatic enrollment is changing the way America saves
America as a people has always struggled with savings, but retirement is looking brighter for many workers because of the jump in automatic enrollments through their employer 401(k) funds.

Defined-contribution asset manager Vanguard released an analysis of its accounts last week, which showed automatic enrollment in 401(k) plans has grown by 70% since the end of 2008.

Between 2008 and 2013, both median and average account balances rose by about 80% - although the median remains not nearly enough to support somebody about to retire, at just $31,396. The median age of participants was 46, so they still have time, but with account balances so small, it’s unlikely they would be able to retire when eligible.

Want to encourage your employees to contribute to their plans? Then don’t offer after-tax contributions: fewer than one in five participants in plans offering such contributions saw their savings accumulate over the past year. Plans requiring one year of service before employer matching contributions also saw low participation, at just 28%. On the other hand, catch-up contributions proved particularly enticing for participants, with 97% adding to their savings in such plans.

Vanguard Center for Retirement Research senior research analyst Jean Young pointed to technological advances for driving the positive trends in 401(k) plans. “Plan design choices such as automatic enrollment…wouldn’t have such widespread utilization without the technology that enables them,” she said. “I’m excited to see defaults improving…35% (of plans) now default participants to a saving rate of 4%, 5%, 6% or even higher.”

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