Article: 401K auto-enrollment savings rates too low

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DaleMaley
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Article: 401K auto-enrollment savings rates too low

Post by DaleMaley »

Report calls auto-enrollment default contribution rates "anemic' by Robert Steyer in Pensions & Investment magazine.
“Anemic” default contribution rates among defined contribution plans using automatic enrollment stand in stark contrast to what plan executives consider optimal savings rates, a survey by the Defined Contribution Institutional Investment Association has found.
The survey results show a big difference between what executives say and what they do. For example, the survey found that 87% of the respondents said the optimal savings rate for participants was 10% or more before any company match. Yet among the 44 plans in the survey employing automatic enrollment, 55% set a 3% default rate; another 7% of respondents were even lower.
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livesoft
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Post by livesoft »

I'm not sure this is newsworthy at all. So a company has an automatic enrollment plan and contributes 2% or 3% of salary automatically to the employee account.

Sure, that's well below the 18% to 20% suggested by some experts as a good contribution rate, but it is in the same range as non-automatic plans that match 50% of up to 4% to 6% of salary by an employee contribution.

In other words, it's just another way of saying that employees do not contribute enough to their defined contribution plans.

In my younger days, I was in a DC plan that my employer contributed 15% of my salary to. The laws changed to make that illegal, so my employer contributed 9% and gave me a 6+% pay raise. I just took the raise and contributed it to my plan, so I was made "whole".

The article did not suggest that employers cut salaries by 15% and use that 15% to make employer contributions to the auto-enrolled DC plan. Now that suggestion might have been newsworthy.
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pkcrafter
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Post by pkcrafter »

An automatic contribution rate of 3% isn't going to do much good. But larger contribution rates may not do much more because if we don't educate employees about finance and the need to save they will probably move out of stocks in the first serious drawdown, or they will remove the money from the plan.




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Post by tfb »

livesoft wrote:The article did not suggest that employers cut salaries by 15% and use that 15% to make employer contributions to the auto-enrolled DC plan. Now that suggestion might have been newsworthy.
That's exactly what the article suggested. The auto-enrollment percentages are about defaulting employees' own contributions to x% unless the employee changes it to y%. Most companies set the default to 3%. The article suggested maybe 15%. In effect the employees will have 15% lower salary and have that 15% go to the plan.
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wintermute
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Post by wintermute »

Unless you know what those people are doing with the rest of their money and what their income is, you can't say that their 401k rate is too low. For example, I only contrib 4% (to get 1% match), then I max my roth at the beginning of every year.
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Post by livesoft »

tfb wrote:
livesoft wrote:The article did not suggest that employers cut salaries by 15% and use that 15% to make employer contributions to the auto-enrolled DC plan. Now that suggestion might have been newsworthy.
That's exactly what the article suggested. The auto-enrollment percentages are about defaulting employees' own contributions to x% unless the employee changes it to y%. Most companies set the default to 3%. The article suggested maybe 15%. In effect the employees will have 15% lower salary and have that 15% go to the plan.
Perhaps. I am influenced by the two plans I have been in that have both been auto-enrollment. The employer contributed to the plan whether the employee contributed or not. That was the auto-enrollment feature. If you opted out, then you opted out of free money.

Nowadays, I am unaware of any auto-enrollment plan where the employee-contribution is set to a 10% or higher level (and where the employee would need to do something to change it lower). But you are right, I don't think the article made a distinction between employer and employee contributions.
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grberry
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Post by grberry »

There are some tradeoffs here. The purpose of a default contribution rate is to get people who would otherwise fail to contribute to actually contribute. So having any default rate is good, by bringing more people in.

At higher rates, employees who don't understand the importance are more likely to stop participating and manually elect a zero rate. At lower rates, employees who don't understand the importance won't be saving enough, but will be better off than if they were at a zero rate. There is thus an empirical question about what rate is optimum for participation - which is likely to be different from employer to employer...
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Post by digit8 »

wintermute wrote:Unless you know what those people are doing with the rest of their money and what their income is, you can't say that their 401k rate is too low. For example, I only contrib 4% (to get 1% match), then I max my roth at the beginning of every year.

That's the big hole that pops up in so many articles looking at retirement based on 401's- ignoring things like IRA's for younger participants, or pension plans for older ones.

I am far from the biggest fan of these plans, but it's maddening to see how many people think you can successfully gauge the look of American retirement in the future from looking at them alone.
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Post by ofcmetz »

In a perfect world we wouldn't have to have SSN. Everyone would have jobs and contribute 15 or 20% of income to 401K's by law.

As an aside, in my job everyone by law get's a pension which is only contributed to from your base pay. Most make at least 50% of their base pay on top in overtime. There are 4 available 403B plans and 1 457B plan available. About 10% of employees contribute money voluntarily.
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