Fidelityâs survey shows Americans save better with automated 401(k) plans, although most of them donât do it that way. A new tool helps you (and them) know how their savings are progressing.
It should come as no surprise that Americans are not saving very effectively toward their rapidly approaching retirements. What is refreshing is HR professionals can help employees do a better job of ensuring their financial futures.
Fidelity Investments’ annual state of the 401(k) industry report, “Building Futures VIII,” reveals that despite low penetration of automatic workplace
savings programs, employees in plans using auto features participate in 401(k) plans at a significantly higher rate, save more, and have more diversified portfolios than employees who are left to their own devices.
According to Fidelity, about 200,000 employees were automatically enrolled into plans as of year-end 2006—up 100 percent over 2005 levels. Employees in plans offering auto enrollment had participation rates 28 percent higher than eligible employees in plans without auto enrollment. Contribution rates were higher in plans that automated annual increases, and lifecycle fund usage more than doubled when offered as the plan default.
“When 401(k) first entered the workplace,” said Jeffrey R. Carney, president of retirement services for Fidelity Employer Services Company, “it was viewed as a supplementary savings vehicle [to Social Security and personal savings]. “Now, it’s becoming the primary savings for retirement. It’s incumbent on employers to make sure their employees are saving enough.”
The survey looked at the habits of 10 million participants in 13,000 corporate defined contribution (DC) plans administered by Fidelity in 2006. The results were telling. “The figures … show inadequate results when employees are left on their own,” said Carney.
The average employee participation rate dropped to 63.1 percent in 2006, compared with 63.4 percent in 2005. The percentage of income employees contributed to workplace savings plans was unchanged at seven percent. In addition, three out of four workers had investment allocations that were not properly diversified for their ages. The average 401(k) account balance increased 6.5 percent to $66,500, from $62,500 in 2005.
Fidelity’s new Retirement Income Indicator lets employers see how auto enrolling all employees using automatic increase programs for contributions and providing lifecycle funds as the default investment option can help employees invest smarter. The indicator can show employers the percentage of income employees are on track to replace from workplace savings and what fully automating plan design could do to improve income replacement levels. The study showed corporate DC employees were on track to achieve 17 percent income replacement. That’s simply not enough, said Carney.
Balances for employees who stayed in the plan from year-end 2005 to year-end 2006 grew on average 20 percent, from $65,300 to $78,500. People who maintained balances from 2001 to 2006 had average account balances of $111,000—up 18 percent from $95,000 in 2005. And although Baby Boomers have shown slight increases in participation and deferral rates, one in three Boomers still doesn’t participate in her plan, and of those who do, most do not contribute to the max.
The Indicator also shows the average Gen Y worker can achieve nearly 50 percent income replacement if she is part of a fully automated workplace savings plan program early in her career. Yet less than one-third (29 percent) of them do so. On average, Gen Y workers defer 4.6 percent of their compensation and have saved only $6,000, well below the 10 to 15 percent of pre-tax salary Fidelity said employees should contribute.
“Early adopters point the way to a more hopeful future,” said Carney. “We have to do everything we can to make sure auto solutions become the rule rather than the exception.”
Why don’t more employers offer auto solutions? They may not want to give the impression they are limiting employees’ choices. But employers can help employees make thoughtful choices for the future, and overcoming corporate inertia is the first step in that plan. HR pros are just the right people to lead the way.