How Employers Nudge Workers to Save More for Retirement

37459863 - setting by your 401k nestegg and money.

37459863 – setting by your 401k nestegg and money.

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.

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.

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.

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