Force Yourself to Save With Auto Enrollment

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By David Pitt, AP Personal Finance Writer

DES MOINES, Iowa (AP) — So many things in our lives are automated these days. Your paycheck may be automatically deposited in a bank account and automatic bill pay has become more widespread. The same ease has come to retirement accounts in a very big way. Auto enrollment, auto escalation and auto rebalancing are increasingly popular.

About 60% of companies with 401(k) plans automatically deduct a portion of a new worker's pay and put it in a retirement account.

Auto enrollment and other automatic features in 401(k) plans grew rapidly after the Pension Protection Act of 2006 gave companies the authority to automatically enroll workers in an effort to get more people to save for retirement.

AUTO ENROLLMENT

Various studies indicate that between one-fourth and a third of eligible 401(k) participants do not enroll.

The number of companies offering auto enrollment has increased by about 10% a year for the past three years, said Pamela Hess, director of retirement research for Hewitt Associates, a human resources consultant. Another 12% of companies indicate plans to add the feature this year, according to a Hewitt survey released last week.

Companies can boost a 60% participation rate to 90% or more by adding auto enrollment, said Dean Kohmann, vice president of 401(k) plan services at Charles Schwab & Co.

"We know when auto enrollment is added a vast majority of employees will stay in the plan," he said.

Still, government regulations require retirement plan providers to clearly inform workers about their rights to opt out of a plan.

A Vanguard study, for example, found 45% of newly-hired workers would voluntarily participate in a 401(k) plan. However, participation soared to 86% in companies that automatically enrolled workers when they were hired.

"Clearly getting people in the plan is a priority," Hewitt's Hess said. "I think the whole industry is rallying around that. It's been a big shift."

Most companies with auto enrollment use it to sign up new workers unless they choose to opt out. Only about 20% of companies take steps to auto enroll existing employees who don't participate and few companies plan on initiating that step.

Frequently the reason companies don't go back and sweep in existing workers is that they don't want to aggravate those who simply don't want to participate, said David Wray, president of the Profit Sharing/401(k) Council of America, a trade group.

The majority of employers with no plans to begin auto enrollment cite the cost of offering a matching contribution as the primary hurdle.

Concerned about holding down costs through the recession, they likely will hold off on auto enrollment to make sure the economy is on the mend. Companies with high turnover including retailers are often hesitant to auto enroll workers with a matching contribution only to see them leave after a few years.

Kohmann said employers with that concern could require workers to stay at least two years before they can keep the company match.

AUTO ESCALATION

Among companies using automatic enrollment about half also use auto escalation, which gradually increases a worker's contribution each year.

Although the amount taken out of a worker's paycheck varies, it's common for companies to start at 3% and increase the contribution by a percent a year. Most cap the contribution at between 6% and 10%.

Some companies allow the contribution to continue escalating until workers reach the maximum amount allowed by the IRS, which is $16,500 for this year.

Although average retirement savings rates remain too low, many retirement experts say younger workers need to save at least 10% of their pay to have enough money by the time they retire to sustain their lifestyle. Generally, older workers should be deferring 15%-20% if they want to retire at age 65.

Some companies delay implementing auto escalation because they're concerned about the cost. As the employee's deferred amount increases, so does the company match.

"A lot of times auto escalation comes later because companies first want to understand the financial implications," said Ed Murphy, head of defined contributions for Putnam Investments. "As companies feel more comfortable about their own business environment you'll see even more adopt auto escalation."

AUTO REBALANCING

More companies also are adding auto rebalancing to their 401(k) plans. Auto rebalancing resets the allocation of stocks, bonds and cash in a 401(k) fund every three, six or 12 months to keep it in line with your desired mix. It ensures that market ups and downs don't cause the account to become too stock-heavy, resulting in too much risk.

Rebalancing is particularly important in a volatile market, such as the one we've seen in the past year two years.

For example, you may want to own 60% stocks and 40% bonds if you're several years from retirement, but want a relatively conservative investment strategy. The stock market surge since last March means the value of your stocks may have risen well above 60% of your portfolio, leaving you vulnerable to losing a significant portion of your savings if the market were to tumble.

Rebalancing is done by selling shares in the stock funds in your 401(k) account and buying more shares in bond funds to get you back to the right balance.

More than half the companies in the Hewitt survey said they offer auto rebalancing. Of those that did not, nearly half said they are likely to offer it this year.

Putnam's Murphy said even though workers have the automated features available, they should still look at their accounts to make sure they know what's happening.

"The set-it-and-forget-it approach is probably not ideal given the volatility of the markets," he said.

Workers should still look at their retirement accounts at least once a year to make sure they're on track to meet their savings goal.
Even with the efforts to push more people to save, the government estimates about 78 million employees work for companies that don't offer a retirement plan.

Small companies are the least likely to offer a plan at all, and those that do are less likely to implement automatic enrollment.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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