Participants in 401(k) plans that offer auto enrollment and auto escalation have a better chance of achieving post-retirement income replacement goals than do participants in plans without these auto features, according to a research report by the Employee Benefit Research Institute issued Wednesday.
EBRI prepared an economic model that looked at income replacement ratios for participants who had more than 30 years of eligibility in a 401(k) plan as well as Social Security benefits. The model contained several conditions, including the assumption that Social Security benefits wouldn't be cut. The model excluded information about individual retirement accounts, IRA rollovers, the impact of participants switching jobs, changes in stock market returns, and employee cashouts from their plans.
For participants in plans without auto enrollment and 1% annual auto escalation, EBRI said 83% to 86% of participants would be able to achieve 60% of their age-64 wages on an inflation-adjusted basis depending on their income. For those in a plan with these auto features, the probability of workers achieving 60% of age-64 wages increased to a range of 88% to 94% depending on income, according to the report, titled “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis.”
If a participant in a 401(k) plan without auto features wanted to achieve 80% of age-64 wages, the EBRI research said the chance of success ranged from 59% to 77% depending on income. However, for those in a plan with the auto features, the probability of success was in a range of 73% to 85% depending on income.
Jack VanDerhei, EBRI research director and author of the report, could not be reached for comment by press time.