Automatic 401(k) enrollment programs are making headway among corporations across America and are expected to gain increasing traction, helping more investors be better prepared for retirement, according to Fidelity Investments.

Fidelity's "Building Futures" annual state of the 401(k) industry report, which is due out this fall, examined 10 million participants in almost 13,000 plans administered by Fidelity at the end of 2006, representing $674 billion in assets.

"The Pension Protection Act is, without a doubt, working precisely as planned," said Jeffrey Carney, president of retirement services at Fidelity Employer Services Co.

While firms are starting to adopt automatic enrollment, the actual number of corporations that have it is small, Fidelity found. In 2006, 301 plans utilized automatic enrollment, up 97% from 153 plans in 2005. But only 2% of 401(k) plan participants, or 200,000 people, were in plans with automatic enrollment.

Small and mid-tier firms that have never had a 401(k) plan before have been the strongest adopters of automatic enrollment, Carney said.

Automatic enrollment among companies is low because it is a fairly new phenomenon, said Tom Modestino, a senior analyst at Cerulli Associates in Boston.

Firms have economic concerns, as well, and costs are associated with getting the program up and running. Automatic enrollment costs companies a lot more money in terms of matching employees' contributions, Modestino noted.

While some employers may feel reluctant to put their employees in an automatic plan, individuals can always opt out or makes changes; this combats the inertia not to do anything, Carney added.

Some companies that have noticed their employees' 401(k) portfolios aren't well enough diversified, or that they aren't investing enough, are not only starting to put new employees in an automatic enrollment plan-but they're also putting existing employees in an automatic enrollment plan, Modestino said.

"It is an aggressive approach and a bit paternalistic," he said. Nonetheless, it shows how companies are really trying to help investors, he added. This could be persuasive for smaller companies to do the same, he said.

The biggest challenge right now is getting firms to adopt automatic enrollment options, Carney said. After that, the challenge is more on an individual level to make sure people stay invested in the plan, he said.

Certainly, automatic enrollment increases participation rates. Participation in 401(k) plans with automatic enrollment increased 28 percentage points from 53% last year to 81%. That's far higher than the overall average participation rate of 63.1%, down slightly from 63.4% in 2005.

As to why participation dipped, Carney said it could be due to the beginning wave of Baby Boomers retiring, coupled with new employees not yet contributing to their 401(k).

David Wray, president of the Profit Sharing/401(k) Council of America in Chicago, believes the doubling of the numbers is positive, especially as the report was conducted using pre-Pension Protection Act numbers.

"It will take several years for automatic enrollment programs to be fully implemented, and people need to be patient," Wray said. "It is a very big decision for companies."

The average 401(k) account balance increased 6.5 % to $66,500 from $62,500, although, newer employees have smaller account balances, which could skew the number, Wray pointed out.

More importantly, the report found that balances for one-year continuous participants who stayed in a plan from year-end 2005 to year-end 2006, grew on average 20%, from $65,300 to $78,500. For those who continuously invested for five years through the end of last year, the average balance grew 18% to $111,000, up from $95,000.

The amount of income that participants contributed remained unchanged, at 7%.

The investment default option is another positive aspect of automatic enrollment programs, with many plans increasingly putting employees in funds targeted to their retirement date. There are a lot of new lifecycle funds being launched, all using good allocation techniques, Modestino said. Another popular automatic default option is managed accounts, experts said.

Automatic increase programs, which increase employees' salary percentage contribution rates yearly, rose 19% last year to 7,315 plans having the feature from 6,136 in 2005. However, only 21 plans automatically increased their employees' contribution rates. The other plans required employees to opt into the option.

The automatic escalation approach is at the threshold, Wray said. This will likely be the last implementation by firms behind the automatic enrollment and default investment options, he said. The process is going to take several years, as firms have to feel very comfortable doing this, he said.

Also, some companies are reviewing whether they should skip the automatic escalation step, and enroll new employees at 6% or the highest company match from the get-go, Wray added.

Many feel optimistic that retirement savings rates will increase. The industry never had the resources to solve the retirement savings problem holistically before, Carney said. "We couldn't solve the problem if we didn't know what it was," he said.

Now, investors have tools that break down how much more money they need to be saving a month to meet their retirement goals, instead of just saying "you need to save more," he said.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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