Retirement savings improve thanks to controversial pension law
Fidelity Investments recently released an analysis of the positive impact of the Pension Protection Act (PPA) of 2006 on employee savings levels, and the results are impressive.
The PPA encouraged 401(k) plan sponsors to adopt auto-enrollment in 401(k) plans, meaning new hires are automatically enrolled in their 401(k) plan and must opt out if they don't want to participate. This is the opposite of the usual situation where new hires must voluntarily sign up for the company's 401(k) plan if they wish to participate.
The Fidelity analysis shows that the average participation among eligible employees in 401(k) plans without auto-enrollment is 55 percent, but that participation rate jumps to 82 percent for plans with auto-enrollment.
The results are even better when you look at young savers: The participation rate for eligible employees age 20 to 24 in plans without auto-enrollment is 20 percent, but it jumps to 76 percent for plans with auto-enrollment.
Fidelity reports that among their largest 401(k) plans - plans with more than 50,000 participants - 63 percent offer auto-enrollment, and that more than half of all participants in any of Fidelity's 401(k) plans are now covered by auto-enrollment.
By providing positive evidence of the success of auto-enrollment, the Fidelity analysis helps refute critics of the Pension Protection Act who say the law actually suppressed savings for retirement.
Note: Many plans will auto-enroll their participants at a savings rate of just three percent of pay. But this is much lower than the amounts needed to save for a comfortable retirement. If you were auto-enrolled in your company's 401(k) plan, make sure you take the time to figure how much you should be saving for a secure retirement and whether you need to increase your contributions.
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Another feature of the PPA was to encourage the use of default investment elections, particularly with target date retirement funds. Fidelity's analysis shows that nearly three-quarters of plan sponsors use these funds as their default investment election, and 42 percent of plan participants are using these funds to help them save.
Note: Target date funds are great ways for new investors to get started, although they should look under the hood of these funds before investing to make sure they understand exactly what they've investing in.
How to pick a target date fund
The best target date funds
While the good news is that auto-enrollment and target date funds help improve retirement savings, they still represent a "Look, Ma! No hands!" attitude towards retirement savings. Take the time to analyze how much you should be saving for retirement and the best way to invest your retirement savings.
Steve Vernon
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Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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