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Employers are increasingly putting retirement savings on autopilot for their workers.
About 62% of businesses with a 401(k) plan used automatic enrollment in 2020, up from 60% the year prior and 46% a decade ago, according to the Plan Sponsor Council of America, a trade group.
This feature lets an employer divert a portion of workers’ paychecks into a 401(k), either immediately or after a few months, if that worker hasn’t signed up voluntarily.
Auto-enrollment leverages worker behavior (inertia, in this case) to their advantage. Workers receive a paper or digital notification ahead of time and can opt out — but most do not.
Vanguard Group, one of the largest 401(k) providers, found that 92% of new hires were still saving in the 401(k) plan three years after being automatically enrolled; in plans with voluntary enrollment, just 29% were still saving.
Companies are also beefing up the automated savings rate for workers, in a bid to help them build a bigger nest egg.
Last year marked the first time more employers used a 6% “deferral” rate rather than 3%, which had been most common. (This is the share of a worker’s paycheck that is saved automatically.)
A third of businesses with a 401(k) plan chose 6% in 2020, while 29% used that lower rate, according to the Plan Sponsor Council of America.
“I think there’s just a recognition that 3% just won’t get us to where we need to be in the long run,” said Hattie Greenan, director of research at the Plan Sponsor Council of America.
Automation
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The increased automation comes as Americans shoulder more individual responsibility for their retirement savings relative to past generations. Life spans are gradually rising, meaning a nest egg must last families a longer time. Almost half of Americans think their retirement savings isn’t on track, according to the Federal Reserve.
Businesses also have an incentive to boost workers’ retirement savings. Financial security may mean greater productivity at work; it may also mean earlier retirements, which could equate to employer savings on health-care benefits, for example, which generally becomes costlier with older age.
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Ten states have also created “auto-IRA” programs, according to the Georgetown University Center for Retirement Initiatives. These require employers to automatically enroll workers into a state-administered individual retirement account if they don’t offer a 401(k) or other workplace retirement plan.
(Four states — California, Connecticut, Illinois and Oregon — are currently active; Maryland and New Jersey are expected to launch their programs in 2022, for example, according to the…