Enhancing 401(k) programs with automatic features can generate a double-barreled investment success, enabling employees to save more for retirement and employers to better recruit and retain those employees.
That key finding is in a new AARP-commissioned report, "Enhancing 401(k) Value and Participation: Taking the Automatic Approach," released this week by AARP and prepared by global professional services firm Towers Perrin.
"AARP believes workers should have access to effective retirement plans, and automatic retirement programs are a double-barreled investment success," noted Jon Dauphine, AARP's Director of Economic Security Strategy. "Auto 401(k)s are a powerful, cost effective way for businesses to give their employees a savings boost and, at the same time, these plans can provide the employer with an important recruitment and retention tool."
According to the Towers Perrin report, competitive retirement benefits, including a 401(k) plan, are among the top 10 considerations for today's employees when choosing an employer, and are even more important for workers age 50 and older. 401(k) plan enhancements can lead to greater employee engagement, which in turn can produce sizable economic returns for a company.
Over a broad spectrum of analysis in various industries, the research suggests that employer contributions and enhancements to 401(k)s typically offer a larger, positive return on investment (ROI) that can sometimes exceed the ROI for spending on other key reward elements, such as pay and bonuses. This high ROI is likely due to employees' increasing focus on retirement savings and security in an era when responsibility is increasingly shifting away from the employer to the individual.
"People are concerned about having enough money to retire, and they really value working for a company that is seeking to provide a cutting-edge retirement plan that works for real people," explained Dauphine. "Auto 401(k)s are so important because they are designed to make the 'right' decisions for workers who may be too busy to learn about and monitor the plan on their own. Auto 401(k)s automatically enroll each new worker, and many of these plans increase the worker's contribution by a small amount each year and place the worker in a prudent investment option, such as a lifecycle fund, if the worker doesn't select their own investments."
"AARP is working with businesses to help them automate their 401(k) plans so that more workers will participate and contribute more to their plans over time," said Dauphine. "Of course, people can opt out of these auto-401(k)s, but research shows that most don't, and that consumers like them because they can lead to such positive savings results."
Ed Schwartz, vice president of human resources for Parsons Brinckerhoff, a worldwide, engineering and construction management firm headquartered in New York, would agree. Since automating the company's 401(k) plan in 2001, participation among its 5,000 employees has increased to 92%. "We wanted to help PB employees save and knew that our 401(k) plan could be a critical component to their financial security," said Schwartz. "Six years later, employees are thanking us for our auto-enrollment program."
To gain insight from the front lines, Towers Perrin interviewed twelve leading employers on a range of issues related to maximizing 40l(k) value. Among eight of these organizations that have implemented automatic enrollment:
- Virtually all have seen their 401(k) participation rates increase measurably
- Most have seen increases in their employees' 401(k) contribution levels
- Most report improvements in their ability to recruit and retain needed talent.
About half of the organizations interviewed said automatic plan features have improved their ability to pass the 401(k) nondiscrimination tests, which have a series of rules to ensure that a sufficient number of employees at all income levels are benefiting from 401(k) plans.
Some interviewees have seen decreased turnover, reductions in 40l(k) loan levels, and increases in average 40l(k) account balances. In fact, one employer noted that after introducing enhancements to its 40l(k) plan, including automatic enrollment, the voluntary turnover went from 18 percent to two percent.
A related study by Harris Interactive of employers with 500 to 5,000 employees, commissioned by AARP, found that the top reasons for having automatic enrollment among 221 employers that have it are:
- Employees save more for retirement (82 percent)
- It demonstrates that the company is a socially responsible organization (49 percent)
- It is easier to pass nondiscrimination testing (44 percent)
- It helps retain employees (30 percent)
AARP is a nonprofit, nonpartisan membership organization that helps people 50+ have independence, choice and control in ways that are beneficial and affordable to them and society as a whole.