Employers are increasingly putting retirement savings on autopilot for their workers.
About 62% of businesses with a 401(k) plan used automatic enrollment in 2020, up from 60% the year prior and 46% a decade ago, according to the Plan Sponsor Council of America, a trade group.
This feature lets an employer divert a portion of workers’ paychecks into a 401(k), either immediately or after a few months, if that worker hasn’t signed up voluntarily.
Auto-enrollment leverages worker behavior (inertia, in this case) to their advantage. Workers receive a paper or digital notification ahead of time and can opt out — but most do not.
Vanguard Group, one of the largest 401(k) providers, found that 92% of new hires were still saving in the 401(k) plan three years after being automatically enrolled; in plans with voluntary enrollment, just 29% were still saving.
Companies are also beefing up the automated savings rate for workers, in a bid to help them build a bigger nest egg.
Last year marked the first time more employers used a 6% “deferral” rate rather than 3%, which had been most common. (This is the share of a worker’s paycheck that is saved automatically.)
A third of businesses with a 401(k) plan chose 6% in 2020, while 29% used that lower rate, according to the Plan Sponsor Council of America.
“I think there’s just a recognition that 3% just won’t get us to where we need to be in the long run,” said Hattie Greenan, director of research at the Plan Sponsor Council of America.
The increased automation comes as Americans shoulder more individual responsibility for their retirement savings relative to past generations. Life spans are gradually rising, meaning a nest egg must last families a longer time. Almost half of Americans think their retirement savings isn’t on track, according to the Federal Reserve.
Businesses also have an incentive to boost workers’ retirement savings. Financial security may mean greater productivity at work; it may also mean earlier retirements, which could equate to employer savings on health-care benefits, for example, which generally becomes costlier with older age.
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Ten states have also created “auto-IRA” programs, according to the Georgetown University Center for Retirement Initiatives. These require employers to automatically enroll workers into a state-administered individual retirement account if they don’t offer a 401(k) or other workplace retirement plan.
(Four states — California, Connecticut, Illinois and Oregon — are currently active; Maryland and New Jersey are expected to launch their programs in 2022, for example, according to the Center.)
Financial planners and retirement services firms generally recommend people save at least 15% of their gross salary each year for retirement. (That total includes an employer 401(k) match.)
Research shows that raising an employee’s deferral rate (to 6% instead of 3%, for example) doesn’t generally cause workers to quit a 401(k) plan due to lower take-home pay.
About 85% of workers earning between $15,000 and $30,000 a year participated in their 401(k) regardless of whether they were automatically enrolled at 2% or 6%, according to Vanguard.
However, the firm notes that 6% likely isn’t a sufficient savings rate for most workers unless an employer also has a “very generous” match.
Employers have automated other aspects of the plan, too, to help boost savings rates and overall 401(k) participation. Nearly 79% percent of plans with auto-enrollment also use “automatic escalation,” a feature that gradually raises a worker’s savings rate over time, generally once a year and up to a maximum rate. That share is up from 75% in 2019 and 68% five years ago.
Most plans cap the rate at 10%, but there’s been a shift toward higher rates, according to the Plan Sponsor Council of America. Some employers may also automatically “sweep” all non-participating employees into their 401(k) each year, with the goal of keeping more workers in the plan over time.