A penny saved is a penny earned, or so the old adage goes; but, more and more, employers are saving their workers' pennies for them.
A recent report by Hewitt Associates, a human-resource consulting group based in Lincolnshire, Ill., shows that of 227 large companies surveyed, only 6% are confident that their employees are adequately preparing for retirement, compared to 12% of employers last year.
To stoke their employees' inclination to save, about one quarter of the respondents said that they are automatically enrolling their employees in their 401(k) or defined contributory savings plan. Employees have the option to opt-out anytime. "Automated features change the equation, so that the inertia around retirement saving and investing works in the employee's favor," said Lori Lucas, Hewitt's director of participant research.
Another 48% of companies surveyed said that they are "very" or "somewhat likely" to begin automatic enrollment this year.
For employers, automatic enrollment helps clear non-discrimination hurdles set by the Internal Revenue Service by virtually guaranteeing participants span all pay grades and age groups.
In an era of waning pensions and other employer-sponsored retirement plans, exhibited most recently by IBM, workers who don't save now will be in trouble later. According to Hewitt, only 67% of large employers surveyed in 2006 offer pensions, compared to 91% in 2005. Of those that still offer the traditional retirement benefit, 29% considered closing participation in 2006 "somewhat" or "very likely."
"A change is taking place, and people are powerless to stop it," said Stephen Brobeck, a financial expert at the Washington-based watchdog, Consumer Federation of America.
Automatic enrollment is important because it essentially forces a population generally preoccupied with the present to proactively plan, if even a little, for the future, said Brobeck, who called 401(k) plans "the most effective way Americans can save and build wealth."
Studies suggest that American workers aren't opposed to saving, but are intimidated by investing. In its 2005 Retirement Confidence Survey, the Employee Benefit Research Institute of Washington showed that when asked about their outlook on automatic enrollment, 49% of 401(k) participants described their feelings as "positive," and 26% felt "indifferent." Forty percent of non-401(k) participants said they would be "very likely" to participate if they were automatically enrolled, while 26% said they would be "somewhat likely" to stay.
Forced savings works, according to behavioral economists, because it is painless. "This is a group that had been very reluctant savers," University of Chicago Professor Richard H. Thaler told the U.S. Senate's Help America Save panel in March 2004. When 401(k) contributions are taken directly out of employee's checks, and placed in a pre-selected fund, investing suddenly is far less frightening.
But many workers apply the same laissez-faire approach to managing their 401(k) accounts, as they do to joining them in the first place. So while it's true that an employee saving 3% per annum may be putting away more than he or she had been before, it's just as likely that by the time they retire, they still won't have saved enough. Experts suggest workers save between 10% and 15% each year, without interruption, in order to guarantee they have enough saved to maintain their lifestyle after they retire, Lucas said.
Once-reluctant workers can easily be encouraged to escalate their savings. In 2004, Thaler and Shlomo Benartzi, of the University of Californa, Los Angeles, studied what happened when workers' contributions were automatically increased by a percent or two each time they received a raise. Within 14 months, participants increased their savings from 3.5% to 9.4%. In just over two years, they were still enrolled and putting away 13.6% of their pre-tax pay.
Seventeen percent of the companies Hewitt surveyed plan to implement the Thaler-Benartzi model in 2006, while 6% said they plan to increase the automatic contribution rate.
Some companies remain skittish, however. In the absence of any Federal guidelines governing automatic enrollment, and there are no guarantees that employees whose accounts lose value won't blame, or possibly sue, their employer. In response, plan sponsors have typically chosen conservative, one-size-fits-all portfolios that, given inflation, actually serve very few well.
In a letter to the Department of Labor last September, the Investment Company Institute asked the regulator to provide employers so-called "safe harbor" protection against the threat of automatically enrolled employees holding their companies liable for market volatility. In fact, 36% of respondents to the Hewitt survey said they would not begin automatic enrollment until the Department of Labor offers guidelines.
Until then, Brobeck said, employers must continue to educate their employees to explain 401(k) investing and company match programs, and employees must push their employers to offer help in the absence of pensions. "There needs to be an alternative," he said.
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