401(k)s With ‘Automatic’ Steering Drive Savings Success

Andrew Webb admits he knows nothing about stocks and bonds. Despite the lack of understanding about all things Wall Street, Webb nonetheless is grateful his retirement savings program is like a button on his car radio — preset to load a percentage of his pay into the company 401(k) plan.

The 27-year-old business development manager at AC Pro said he was automatically enrolled in the plan after one year of service, contributing 4 percent of his pay. The Fontana, California-based air conditioning distributor and manufacturing company matched his contribution and automatically bumped it last year by 1 percentage point. He’s contributing 5 percent of pay (and getting 4 percent from the company) and said he is confident about saving enough for retirement.

“I don’t think I would be thinking about retirement and understanding all the terms if all this weren’t being done for me,” Webb said. “I’m sure there are people who follow trends and can invest successfully, but I’m thinking, ‘Why not let this fund do it for me?’ ”

Webb is one of a growing number of 401(k) participants who have automatically been put on a path of saving for retirement. If done aggressively, a worker’s 401(k) account balance can increase by more than 100 percent if employers and plan participants put retirement strategies on autopilot, New York Life Retirement Plan Services data show.

A study found that if done aggressively, a worker's 401(k) account balance can increase by more than 100 percent if employers and plan participants put retirement strategies on autopilot.

Recently, New York Life created an infographic about the retirement savings journey a 25-year-old worker would travel, starting with an annual salary of $35,000. The information includes an annual raise of 3 percent, an employer matching 50 percent of the worker’s 6 percent of pay contributed to the 401(k), and a 6 percent return on investments; all assumptions were based on New York Life Retirement Plan Services’ participant behavior.

No doubt it’s a lot of numbers, but in the end, the graphic illustrated various outcomes of final savings, ranging from $600,655 to nearly $1.3 million.

The difference in the range points to the varied use of automatic features, said Pat Murphy, New York Life’s CEO of retirement plan services. The $1.3 million figure would require employers to automatically enroll participants at 6 percent of pay and increase their contributions annually by 1 percentage point (to a ceiling of 10 percent).

Many workers don’t sign up for a plan because they don’t know where to invest or how much, Murphy said. “Most people want to do the right thing, and auto-solutions help them do that.”

Automatic features have been around for a long time, but got more attention in 2006 when Congress passed a law that said employers could put workers in 401(k) plans at a minimum starting rate of 3 percent of pay and invest that money into specifically approved investments, including target-date funds. The law also allowed plan sponsors to automatically bump participants’ contributions annually without their say-so. If workers didn’t like being in the plan, all they had to do was opt out.

“It changed the choice that employees had when they joined a company,” Murphy said, adding that a worker who was automatically enrolled in a plan and decided not to participate, must actively choose not to save in the company 401(k) plan.

Prior to auto-features, workers had to make a lot of choices, such as enrollment, level of participation and investments. Decades of research on participant behavior in 401(k) plans showed that many participants don’t like making these choices. Many workers chose not to participate over being faced with the myriad choices — even when employers promised matching contributions.

If one decision is made for them, participants tend to make other ones on their own, research from Bank of America Merrill Lynch’s quarterly “Wellness Scorecard” showed. Since the beginning of 2012, 41 percent of 93,804 workers who were automatically enrolled in a 401(k) plan for at least a year and didn’t have a pre-set annual boost in salary contributions voluntarily increased that rate. 

“Once people see their [account] balances building, they take ownership of their accounts,” said Kevin Crain, senior relationship executive at Bank of America Merrill Lynch.