Employer-sponsored retirement accounts began as do-it-yourself savings plans. You decided if you wanted to save, if so how much — and how to invest that money. Unfortunately, many participants were lost in the process. Rather than figure it out, they just sat it out.
Faced with a workforce financially unprepared for retirement, employers are beginning to offer do-it-for-me options for their retirement plan participants. Plan sponsors seem to be saying, “If you won’t do it, we’ll sign you up, invest your money and boost your savings rate along the way.”
As a former professional hockey player in the NHL, Bernie Wolf believes practically forcing Americans to save for retirement is a good idea.
“I had an opportunity to contribute extra money into my retirement plan, but I would have had to fill out some forms,” Wolf tells Money Cynic. “I was in my 20s and thought retirement was several lifetimes away. So I didn’t add anything extra to my plan — and I regret it today.”
By the end of 2014, well more than half (60%) of newly-hired employees participating in Vanguard 401(k) plans were automatically enrolled. Almost half (45%) of participants were solely invested in an automatic investment program —such as a target-date fund — compared with just 9% at the end of 2005. And seven-in-ten auto-enrollment plans had also instituted automatic annual deferral-rate increases, according to a Vanguard report.
“The first step in retirement savings is participation,” Jean Young, a senior research analyst with Vanguard said in a statement. “Over the past decade, we’ve seen a meaningful jump in total participation rates. Three-quarters of eligible workers now participate in their employer’s plan, up from two-thirds ten years ago, underscoring the impact of autopilot plan designs.”
“These professionally managed investment options have the potential to reshape retirement savings outcomes for these participants,” added Martha King, managing director of the Vanguard Institutional Investor Group. “They signal a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”
As a result, for the five-year period from 2009 to 2014, average Vanguard plan balances rose by 28% — while total returns averaged 9.9% per year.
But even with all of these “we’ll do what’s best for you” efforts, Americans are still under-saving. Because default deferral rates are often set at a low 3% or less — and participants aren’t ratcheting up their contributions voluntarily — retirement savings are still lagging projected future needs. For example, Vanguard recommends a target savings rate of 12%–15%, including the employer match.
But Wolfe, now a financial planner in Chevy Chase, Maryland, believes that target savings rates can intimidate investors.
“That freaks a lot of people out,” Wolf says. “What I would say is, if your employer is matching the first 3%, at least put 3% away and get the free money that your employer is offering. If it’s 4% that they’re matching, at least do that.”
Originally published on TheStreet