Posts Tagged "auto-enrollment"

401k Plans Evolve to Boost Workers’ Savings

Many employees in the private sector, when left to their own devices, either save very little in the company retirement savings plan or don’t even sign up for it.

But a growing number of companies have revamped their 401(k)-style plans over the past two decades to strengthen the incentives for employees to save. While progress has been gradual and uneven, the companies are moving in the right direction.

In a new study, researchers have compiled a unique nationally representative data set that tracks the changes employers have made to their 401(k)s and 403(b)s. The findings describe three important areas in which they are making progress:

  • About 41 percent of the largest 4,200 U.S. employers in this study automatically enrolled workers in a savings plan in 2017 – up sharply from 2 percent in 2003. Workers can still opt out but the vast majority remain in the plans.
  • Similar improvements were also evident in the study’s broader sample of employers of all sizes. In 2017, about a third of all companies had auto-enrollment, compared to virtually none in 2003.
  •  Among companies with auto-enrollment, about 44 percent of the large employers and half of the overall sample are automatically increasing their workers’ contributions.
  • Contributions to the plans are generally rising too.

The researchers credited some of the improvements to the Pension Protection Act. The 2006 law explicitly allowed companies to automatically enroll employees in savings plans and also established a minimum standard for the level of employer contributions made by companies that adopt auto-enrollment. …Learn More

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Does Increased Debt Offset 401k Savings?

Roughly half of U.S. employers with a 401(k) plan enroll their workers automatically, deducting money from their paychecks for retirement unless they explicitly opt out of this arrangement. This strategy is widely viewed as a good way to get people to save.

But auto-enrollment might not be as effective as it seems, if individuals are compensating for a smaller paycheck by borrowing more.

A new study of civilian employees of the U.S. Army used credit and payroll data to gauge whether debt increased for employees who were automatically enrolled in the federal government’s retirement savings plan. The researchers compared changes in debt levels for people hired after the government’s 2010 adoption of auto-enrollment with hires prior to 2010.

The good news is that since the broadest debt category, which includes high-rate credit cards, did not increase, it did not offset the employees’ accumulated contributions. Their credit reports showed no increase in financial distress either, the study concluded.

However, the findings for car and home loans were ambiguous, so auto-enrollment “may raise these latter types of debt,” said the researchers, who are affiliated with NBER’s Retirement and Disability Research Center.

If workers are, in fact, borrowing more, the question, again, is whether the new debt is offsetting the additional savings under auto-enrollment. Auto and home loans – in contrast to credit cards – are used to finance an asset that has long-term value. Whether these forms of debt improve or erode net worth depends on the asset’s value and whether the value rises (say, a house in a growing city) or falls (a car after it’s driven off the lot).

The researchers did not have access to data on federal workers’ assets, which they would need to see what’s happening to their net worth. This remains an important question for future research. …Learn More

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Modifying a Retirement Plan is Tricky

Employers beware: changing your retirement plan’s design can have unfortunate, unintended consequences for your employees.

That’s what happened to the Thrift Savings Plan (TSP) for federal workers, says a new study by a team of researchers for the NBER Retirement and Disability Research Center.

Like many private-sector savings plans, the $500 billion TSP – one of the nation’s largest retirement plans – has automatic enrollment. Federal employees can make their own decision about how much they want to save and, in a separate decision, how to invest their money. But if they don’t do anything, their employer will automatically do it for them.

In 2015, the TSP changed its automatic, or default, investment from a government securities fund to a lifecycle fund invested in a mix of stocks and bonds with the potential for higher returns than the government fund. However, the employer did not change the plan’s default savings rate for workers – 3 percent of their gross pay. (The government matches this contribution with a 3 percent contribution to employees’ accounts.)

After the TSP switched to the lifecycle fund, the new employees at one federal agency – the Office of Personnel Management – started saving less, the researchers said.

This probably occurred because, in passively accepting the TSP’s new lifecycle fund – a more appealing option than the old government securities fund – they were also passively accepting the relatively low default 3 percent contribution.

Employees seem to “make asset and contribution decisions jointly, rather than separately,” the researchers concluded. …Learn More