A survey recently found that laws allowing employers to automatically enroll employees in 401(k) plans don’t work as well as was hoped. When workers automatically contribute to a retirement plan unless they opt out, they will often put in less than they would if they chose to start a plan.
Automatic contributions fall short of voluntary contributions
A recent study of 401(k) contributions found that a 2006 law giving employers the right to automatically enroll workers in a 401(k) plan has not been very effective in getting people to put more money toward retirement, according to the Wall Street Journal. The law was passed during the George W. Bush administration, which emphasized privatizing Social Security and other retirement plans. The onus was that if people had a 401(k) to contribute to, they would put more money aside into a retirement account. However, the Employee Benefits Research Institute found that most workers who are automatically enrolled into a 401(k) often put in far less than their counterparts who voluntarily begin contributing to a plan.
Most choose default setting
The study found that more than 50 percent of people who were automatically enrolled into a 401(k) plan would contribute 3 percent or less of their salary to their retirement accounts, or whatever the employer-set minimum contribution was. However, more people are contributing to retirement funds as total contributions to 401(k) plans has increased by 13 percent nationwide since the law was enacted in 2006. Aon Hewitt, a human resources company that administers a large amount of 401(k) plans, reported that 85 percent of employees participate — don’t opt out — in companies that use auto-enrollment on average and 67 percent opt-in at companies that don’t.
Next generation of retirees face cash shortfalls
Average contributions were found to have dropped slightly over the past few years, and most people are thought to not be able to rely on 401(k) savings alone for their retirement. The Government Accountability Office, according to Reuters, recently released a report stating that more people can expect outlive their retirement savings in coming decades and need to contribute more heavily to retirement accounts and look into annuities as a possible retirement booster. The GAO also recommends people wait until after retirement age to file for Social Security benefits. More people are expecting to work longer as well, according to WalletPop, as financial services firm First Command found in a survey. The First Command survey found that up to 22 percent of survey respondents between ages 25 to 70 who made at least $50,000 per year expected to work until at least age 70.