Automatic enrollment, escalation features feed 401(k) success

It’s been said that the overwhelming inertia of America’s savers – who know they should be doing more, or anything, but can’t get their act together – might be a positive factor when it comes to 401(k) plan success.

More and more, companies which have integrated auto-enrollment and auto-escalation features into the retirement plan design are producing impressive participation and savings rates, more in line with the targets that will result in the kinds of 401(k) balances participants will need in retirement.

Fidelity Investments, one of America’s leading 401(k) plan administrators, says it is seeing the results of the adoption of more automatic features by plan sponsors in first-quarter numbers. The company’s average 401(k) account balance is up to $88,600, 9% more than a year earlier and, more impressively, 92% higher than the same period in 2009, when the financial downturn decimated many 401(k) account holdings. Pre-retirees aged 55 and over are also in marginally better shape, with average account balances of $165,000.

Also see: Employees getting back on the 401(k) bandwagon

Doug Fisher, Fidelity’s senior vice president of policy development and market planning, says that the integration of automatic features has proven to be one of the most effective – and drama-free – paths to participant success.

“Automatic features are driving an overall resurgence in more purposeful automatic solutions, especially when it gets participants to a meaningful savings rate,” he notes. “And that’s also causing plan sponsors to rethink the efficacy of their matches, as that can be a ceiling that discourages more savings on the part of participants.”

As a general benchmark, plan sponsors who have adopted automatic enrollment for new hires – or even adopted auto-enrollment standards for existing employees, as part of an overhaul of their plans – tend to see only marginal numbers of employees opting out of the savings plan, especially when a company match is provided.

To that end, that inertia can be more wisely utilized by using a bit of behavioral psychology and offering participants a range of savings rates higher than the admittedly low 3%, standard in most plans, adds Jeanne Thompson, vice president of thought leadership with Fidelity – Fidelity’s average employee deferral rate is now hovering near 8%.

“It’s a question of how things are framed,” she says. “When people are offered three options, they always picked the lowest one, so pick a range that starts at 8, 10 or 12% instead. Even with higher rates, 90% of participants don’t jump out of the plan.”