Employees in many 401(k) plans are saving much more than they realize.
According to recent surveys by Aon Hewitt, Vanguard Group and — just released this month — the Plan Sponsor Council of America, companies that automatically enroll their workforce into 401(k)s have been inching up the amount they automatically pull out of paychecks to invest in the plans. While the majority still auto-defer 3 percent of salary — the long-standing norm — one fourth to one fifth of plan sponsors now take 5 percent or more.
And that’s just the beginning.
Plans are set to withdraw a whopping 10 to 15 percent of paychecks in five to 10 years. Robert Benish, the Plan Sponsor Council’s executive director and interim president, predicts that plans will do that automatically. “Once sponsors get comfortable with this, and they see that the impact is positive and not negative in their employee population, it will continue to grow,” he says. Most likely, there would be a starting rate of 6 percent of salary that increases 1 percent per year until hitting the target.
Experts have long bemoaned the 3 percent contribution as far too low. They say people need to sock away 12 to 17 percent of their earnings to accumulate enough to retire on, numbers that are not unusual in Dutch and Australian retirement plans. But because employees rarely change whatever default rate their employer sets, the theory goes, plan sponsors will have to raise that rate for them.
A company match could probably provide part of any forced-savings increase. However, no one seems to expect the match to get any better than the typical ratio now — half of all worker contributions up to 6 percent of salary, or just 3 percent of the total needed.
“Most employers have established how much money they’re going to spend on benefits,” says Jean Young, a senior analyst at Vanguard’s Center for Retirement Research. If they increase their benefits budget, it will go to medical costs, not retirement, she adds.
Thus, if retirement plans are to get fatter, most of the burden will fall on the employees.
And they might not even know it. The basic idea behind auto-enrollment, after all, is that people are put into the 401(k) as an intrinsic part of the hiring process, or after they are already working, and they have to make a conscious decision to get out. The same principle applies with auto-defaulting: The money flows out of their paycheck and into their 401(k) unless people object.
Apparently, few people do. Aon Hewitt reports that less than 10 percent of employees reject auto-enrollment, regardless of the salary-default level, and Vanguard had similar results in 2008 when it surveyed the 2,100 plans it administers.
Why don’t they protest when withdrawals rise? Even Patti Balthazor Bjork, Aon Hewitt’s director of retirement research, says “it’s surprising that they’re not upset.” Partly it’s due to the same reason they don’t increase the standard 3 percent rate on their own. “Default tools are very powerful, and the levels that you choose are very sticky,” Vanguard’s Young says.
As well, now that more than half of companies auto-enroll, it’s just become standard operating procedure, Young and others suggest. The Plan Sponsor Council’s Benish also points out that there are tax advantages to saving in a 401(k).
Teresa Ghilarducci, director of the New School’s Schwartz Center for Economic Policy Analysis, suggests a generational divide: Young workers dislike any shrinking of their paycheck, but once they hit their early forties, “they’re quite happy to see the accumulation.” And if the employees don’t realize it’s happening, even better. “That’s the beauty of the system, that they’re a little bit unconscious of it,” she says. “They know they won’t do it themselves.”
