Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • Dow

    39,760.08
    +477.75 (+1.22%)
     
  • Nasdaq

    16,399.52
    +83.82 (+0.51%)
     
  • Bitcoin USD

    70,665.22
    +475.55 (+0.68%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.37
    +20.39 (+0.26%)
     
  • Gold

    2,233.50
    +20.80 (+0.94%)
     
  • Crude Oil

    82.51
    +1.16 (+1.43%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Nikkei

    40,168.07
    -594.66 (-1.46%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE Bursa Malaysia

    1,530.60
    -7.82 (-0.51%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

How Employers Nudge Workers to Save More for Retirement

When they are properly funded, 401(k) plans can help you build a nest egg for retirement. But employees often fail to take action and start saving in the account. To get more people to participate in the plan, many employers now automatically sign workers up for the company 401(k) plan unless they opt out. Here are some of the strategies companies are using to encourage employees to save for retirement.

[Read: How Your 401(k) Balance Stacks Up.]

Automatic enrollment. Just over half (51 percent) of 401(k) plans automatically enrolled employees in the account in 2015, up from 40 percent in 2011, according to a T. Rowe Price analysis of 662 plans with over 1.6 million participants. Automatic enrollment has succeeded in getting more workers to participate in 401(k) plans. Significantly more employees (88 percent) save in 401(k) plans with automatic enrollment than plans without this feature (48 percent), T. Rowe Price found. Enrolling employees in the 401(k) plan by default has been especially effective in getting 20-somethings into the 401(k) plan, who are typically less likely than older employees to sign up for the retirement account on their own.

A higher default savings rate. Employees who are automatically enrolled in the 401(k) plan tend to save a smaller percentage of their salary than workers who select their own amount to save. The most popular default savings rate for automatically enrolled employees is 3 percent of pay, and 38 percent of T. Rowe Price plans withheld this amount from employee paychecks in 2015, down from 50 percent in 2011. That's far less than the 7 percent average deferral rate among all T. Rowe Price plan participants. But employers are increasingly enrolling their workers in the 401(k) plan at a 6 percent or higher default savings rate, climbing from 17 percent of plans in 2011 to 30 percent in 2015.

ADVERTISEMENT

[See: 10 Ways to Make Your 401(k) Balance Grow Faster.]

The default savings rate can also have implications for qualifying for a 401(k) match. If your employer will match your contributions up to 6 percent of pay, but 3 percent of your salary is automatically withheld, you will miss out on half of the match on offer. It's worth looking into the amount you need to save to receive the full 401(k) match your job provides and switching to that savings rate if you are able to do so. Workers have the option to increase their 401(k) contributions or to stop automatic deposits to the retirement plan.

Automatic increases. Many employers (69 percent) also automatically increase the amount their employees save for retirement over time, typically by 1 percent each year. A few plan sponsors boost the savings rate by 2 percent annually unless employees make another selection.

The default investment. Almost all employees (96 percent) who are automatically enrolled in a T. Rowe Price 401(k) plan are invested in a target-date fund, which is a single diversified fund that grows more conservative over time. However, target-date funds vary considerably in how quickly the asset mix changes as you approach retirement and the fees charged. If you have concerns about the costs or underlying investments in your target-date fund, check out the other investment options available in your 401(k) plan. The default investment is assigned to you largely based on your age, but might not be appropriate for your specific circumstances or risk tolerance.

[Read: How to Avoid 401(k) Fees and Penalties.]

An opt-out option. Retirement savers are generally allowed to stop their 401(k) contributions or increase the amount they are saving at any time, and can move their money into other investment options in the 401(k) plan. But if you do nothing, you will continue to save at a rate of your company's choosing and invest in a fund selected by the employer or plan sponsor. Automatic enrollment can prevent procrastination and quickly get new employees enrolled in the plan at what is often a busy time of changing jobs and getting settled into a new work routine. However, individuals should carefully look over the default settings to make sure they match up with saving and investment goals.

Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."



More From US News & World Report