Auto Features Seen as Key to Retirement Saving Success

A news release said that automatic features in 401(k) plans increases the likelihood of younger employees – those with 31-40 years of work ahead of them – by more than 30% of being able to hit an 80% pre-retirement real income replacement target for both low and high income workers.

These findings are part of new research by the Employee Benefit Research Institute (EBRI) and the Defined Contribution Institutional Investment Association (DCIIA).

The study finds that 401(k) plans are more likely to achieve the desired results if they have a higher automatic-enrollment contribution rate cap, a successful program to reduce automatic contribution escalation opt outs, and a higher annual auto-contribution escalation rate.

“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 Jack VanDerhei, EBRI research director and author of the study, in the news release. “Increasingly, we are now able to quantify just how big that impact will be.”

Among the other findings in the study:

• Increasing the auto-contribution escalation cap had by far the greatest impact of any factor on increasing the probability of success in the analysis (as defined by participants achieving an 80 % real replacement rate in retirement), with a projected 16.4%-increase for the lowest paid workers, and a projected 14.1 %-increase for the highest paid workers.
• Successfully discouraging opt-outs in auto-contribution escalation, ensuring that employees remember and implement deferral levels from their prior 401(k) plan instead of remaining at the auto-enrollment default, and increasing the annual auto-contribution escalation rate from 1% to 2% individually had a much smaller impact, ranging from 0.4% to 1.8%.
• When all four design elements and behaviors are optimized, the probability of success increases 33.5% to 37%, depending on income quartile.