Higher automatic enrollment and contribution escalation rates improve 401(k) participants’ chances of getting 80% of their preretirement income at retirement through their 401(k) plans and Social Security payments, according to a new study by EBRI and the Defined Contribution Institutional Investment Association.
Such moves, along with discouraging participants from opting out of auto escalation, will increase the chances of reaching that 80% retirement level by more than 30 percentage points for workers with 31 to 40 years of plan participation remaining, from 45.7% to 79.2% for lower-income workers and from 27% to 64% for higher-income workers.
“The takeaway for plan sponsors is that it is really important to implement auto features in a robust way and not be overly conservative when it comes to things like the contribution cap and the annual increases,” one of the study’s co-authors, Lori Lucas, said in an interview. Ms. Lucas is senior vice president and defined contribution practice leader at Callan Associates and the DCIIA’s executive chair of research.
“Our simulation models have shown for some time that auto enrollment and auto escalation are likely to have a tremendously positive impact on workers’ retirement savings,” Jack VanDerhei, Employee Benefit Research Institute research director and study co-author, said in a news release. “Increasingly, we are now able to quantify just how big that impact will be.”
The report on the study, “The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy,” is available on EBRI’s website, http://www.ebri.org.