Auto enrollment, escalation and target-date features in 401(k) plans are effective in boosting savings substantially, especially for lower-income workers, according to a report from the Employee Benefit Research Institute (EBRI) and the Defined Contribution Institutional Investment Association.
With automatic 401(k) features in play, the chance of lower-income workers hitting an 80% pre-retirement income replacement target rises from 45.7% to 79.2%, and for higher-income workers, the chance rises from 27% to 64%.
The most effective automatic feature, of course, is higher contributions, followed by a program to reduce the number of opt-outs.
“Our simulation models have shown for some time that auto-enrollment and auto-escalation are likely to have a tremendously positive impact on workers’ retirement savings,” said EBRI Research Director Jack VanDerhei. “Increasingly, we are now able to quantify just how big that impact will be.”
“Plan sponsors may believe that simply having automatic enrollment and automatic contribution escalation is sufficient to ensure good retirement savings outcomes,” added Lori Lucas, executive research chairman at DCIIA and defined contribution practice leader at Callan Associates. “These results clearly point to the fact that robust implementation and utilization are key.”