In releasing its annual report on the state of the 401(k) industry, Fidelity Investments stressed that while automatic enrollment in 401(k)s is still not widespread, it has a significantly positive effect on participation, savings rates and diversification.
A mere 200,000 employees are automatically enrolled in 401(k) plans in 2006, twice than were in 2005, Fidelity found, by analyzing the 10 million participants in the defined contribution plans it administers in 13,000 plans. But at companies that had auto enrollment, participation in 401(k) plans was 28 percentage points higher than in plans that didn’t have such a feature. Nonetheless, participation declined slightly in 2006, to 63.1%, from 63.4% in 2005. The amount of income that participants contributed remained unchanged, at 7%. Fidelity recommends that investors place between 10% and 15% of their salaries in 401(k)s.
The balances of those who stayed invested in their 401(k) throughout all of 2006 grew 20% to an average of $78,500, up from $65,300. 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.
“We’re pleased to see that the number of employees automatically enrolled has doubled and adoption by employers is growing,” said Jeffrey R. Carney, president of retirement services at Fidelity Employer Services Co. “But we need to remember that this is still roughly 2% of all participants, which means there’s much more to be done to improve workers’ retirement readiness.”
Carney added: “Although many employees are trying to improve their savings behaviors, these numbers prove that change can be slow and most workers urgently need the guardrails of auto programs to help ensure they will have sufficient savings to live on in retirement.”
At the same time it released the findings of its 401(k) report, Fidelity unveiled a retirement income diagnostic tool, the Retirement Income Indicator, that employers can use to determine how well prepared their employees will be for retirement.