Automatic Retirement Planning

I ended the short 4^th of July week finishing up an employee benefits audit, so two new studies on defined contribution pension plans stood out to me. For those of you who didn’t spend the last few weeks immersed in retirement plan details, a defined contribution plan refers to the plans most of us have, which are supposed to keep track of the money we put in, but make no promises on how much will be available when it’s time to retire. 

The first study I read about in the Wall Street Journal.  It looks at the impact of auto-enrollment plans on contribution rates.  When you auto-enroll the company sets you up in the plan when you’re hired.  The idea is to get more people participating in plans by eliminating the extra work of having to separately sign up for the plan.  According to the study it worked in terms of raising participation (going from an average of 67% to 85%), but the new participants on average have a lower contribution rate than those who actively opt-in.  The article blames employers for mostly (67% do this) setting a default contribution rate at 3% vs. the 5-to-10% people typically pick when they’re actively engaged in signing up.  Evidence of the adverse consequences is that average savings rates in 401(K) plans fell from 7.9% in 2006 to 7.3% in 2010. 

 

The experts blame at least half of the drop on the lower auto-enroll rate.  It would appear to me there are many other mitigating factors in terms of reducing 401(k) contributions that have occurred during that same period.  Considering that and the fact that people who are more proactive in terms of saving would likely save more,  it seems to me that auto enroll is actually a good idea.

That brings me to the next EBRI study, which looked at the impact of working longer on giving you enough money to retire.  Turns out – it’s not as helpful as you might think.  For lower income workers, you’d have to work until you’re 84 to have a 90% chance of having enough money to retire.  (They don’t say how long they think you’ll have between the retirement party and running out of money.  Given an average life expectancy in the US of 78.3 years presumably it’s not that long.)  They also said if you have health problems, the numbers look worse.  Finally, the one silver lining is that people who continue contributing to a retirement plan past age 65 are more likely to be able to retire earlier with more money, and that was true for all income groups.  Can we hear another cheer for participating in a retirement plan – even if it’s by default?