Automatic features in workplace retirement savings plans can significantly reduce the likelihood that workers will run short of money in retirement, according to a new study from the Employee Benefit Research Institute released March 27.
If all employers were to automatically enroll their workers in their defined contribution retirement plans at a default contribution rate of 6%, workers’ retirement savings shortfall would fall by 7%, the study found.
The retirement savings shortfall would drop even more if employers added automatic-escalation and automatic portability to their plans.
About 70 million Americans have 401(k) retirement plans, which collectively hold $8.9 trillion in assets, according to the latest estimates of the Investment Company Institute.
If, for example, employers also automatically escalated the deferral rate by one percentage point annually until reaching 12%, the retirement savings shortfall would be cut by 9%.
If employers added all three automatic features – automatic enrollment, automatic escalation and automatic portability – the retirement saving shortfall would close by 16%.
“Plan sponsors and policymakers need to understand the significant impact that plan design can have on participation, contribution rates and asset preservation through the adoption of automatic features,” Craig Copeland, EBRI’s director of wealth benefits research, said in a news release.
The study examined the impact of each of these automatic features using EBRI’s Retirement Security Projection Model, which has been used to evaluate various retirement policy proposals and legislation since its use for the first national evaluation of the retirement system in 2003.
