Automatic Enrollment Builds Retirement Savings – Period.

David C. John / July 01, 2010

Adding automatic enrollment to a 401(k) retirement savings plan builds retirement savings. It especially helps lower and moderate income workers, but employees at all income levels start to save earlier, save more, and have better investment choices than similar plans without that mechanism. This simple fact is true despite some press reports and blog entries suggesting that automatic enrollment may “hurt” retirement savings.

Automatic Enrollment Helps Workers to Save

First a quick explanation: Automatic enrollment reverses the traditional way that people sign up for a 401(k) retirement savings plan by placing them in the plan, saving a set percentage of their income and investing in a specific automatic investment choice unless the worker decides otherwise. The worker continues to have full control and can at any time decide to stop saving, to save more or less, or to change investment choices. However, if the worker does nothing, he or she has started to save for retirement, often much earlier than he or she would have otherwise. Studies show that automatic enrollment especially helps the four groups most likely to under save for retirement: women, younger workers, minorities, and lower paid workers. Under automatic enrollment, participation rates for those groups went from under twenty percent to over eighty percent. (more…)