Finally, there's some good news about 401(k) retirement plans.
No, your nest egg didn't go up 20 percent last night.
Rather, there's new hope that potentially millions more U.S. workers will start putting away retirement money in a 401(k). That could result in billions more in long-term savings for future retirees.
That welcome news comes from the Employee Benefit Research Institute, which says a study that shows employers that have started automatically enrolling new workers in 401(k) plans are seeing participation at nearly double the rates than previously. Once enrolled, new employees tend to stay.
“Everyone is excited about this, but it's so new, we haven't seen the biggest impact,” says Jack VanDerhei, research director at EBRI.
Two large Charlotte-based companies, Carolinas HealthCare System and Duke Energy, say changing to auto-enrollment is dramatically boosting their 401(k) participation.
First, a little background. Two years ago, Congress passed a reform law to help safeguard pensions. One of its least-publicized provisions encourages employers offering 401(k) plans to automatically enroll all new employees, diverting 3 percent of their pay into the plan. That percentage can go up 1 percentage point a year to a maximum of 10.
At most companies, it's the employee who takes the initiative, getting the paperwork, filling it out and deciding how much to deduct and how to invest the savings.
Only about 40 percent of employees take this step, leaving a company's matching funds on the table and depriving themselves of the long-term savings, says VanDerhei.
Across the country, about 50 percent of workers have retirement plans. About 40 percent are enrolled in 401(k)s and about 10 percent have a traditional, defined-benefit pension, he says.
It's usually the youngest and lowest-paid employees who fail to participate in 401(k)s, he notes. That's why it's so important for employers to take the reins. (The pension law doesn't require employers to adopt automatic enrollment, however.)
VanDerhei says most employers were hesitant to do this until Jan. 1, when federal rules finally clarified how employers could invest for automatic enrollees.
Now the floodgates are opening. He says a recent study estimates that about 44 percent of companies with 1,000 or more employees have started auto-enrollment, and many others are considering it.
Carolinas HealthCare was a pioneer, beginning automatic enrollment in 2000, says spokesman Kevin McCarthy. At the time, officials worried that 60 percent participation in the 401(k) wasn't enough, he says.
“We thought some employees just weren't getting around to signing up, and if we enrolled them, a lot would stay in the program,” McCarthy says. “And that's what happened.”
Now, about 90 percent of the system's 15,000 eligible employees participate, he says.
Carolinas HealthCare, like other employers that auto-enroll new hires, allows them to opt out. But relatively few do, says VanDerhei.
Employers can invest automatic enrollees' money one of three ways, VanDerhei says. They can use target-date maturity funds, which adjust risk as a person gets closer to retirement. They can invest in a balanced fund, which puts 60 percent in equities and 40 percent in bonds. Or they can put it with a professional manager to invest, he says.
Most employers use target-date funds, he says. That includes Carolinas HealthCare and Duke Energy, according to the companies' officials.
Richard Jefferies, managing director of retirement plans at Duke Energy, says the company began automatic enrollment Jan. 1.
From January through May, he reports, 382 new hires enrolled themselves, the company auto-enrolled 196, and 76 opted out. Seventeen who initially participated dropped out during that period.
Jefferies says he's pleased that Duke's change resulted in nearly 200 more workers in retirement plans. The company, with about 18,000 workers, has a 6 percent match, he notes. He expects enrollment to continue to rise.
A spot check of area companies indicated interest in the policy, but most say they're still studying it.
Neither Bank of America nor Wachovia have adopted auto-enrollment, according to officials there. But they're not ruling it out in the future.
Another big employer, Matthews-based Family Dollar, doesn't automatically enroll new hires and probably won't, says spokesman Josh Braverman.
Many of Family Dollar's 45,000 employees work in stores. Because retail in general has high turnover, it would likely present difficult administrative problems, he says.
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