For better and for worse, 401(k) plans are a cornerstone of retirement in America.

With defined-benefit pension plans fading out with the Baby Boomers, 401(k)s will be the most important, and in many cases, the only source of income for people in retirement other than their Social Security benefits. (For more, see: Social Security: Saving vs. Delaying Benefits.)

Not Saving Enough

That’s a problem. Americans are not enthusiastic savers. While the personal savings rate of the average American trended up towards 7% of income during the financial crisis, it has now fallen to 5.7% as the economy has recovered.

The result is low balances in retirement accounts – both 401(k)s and individual retirement accounts (IRAs) – that likely won’t last long when individuals stop earning income and start drawing on them. According to a study by the Employee Benefit Research Institute, at the end of 2013 less than 50% of American families had a retirement account and the median account balance for those who did was just $59,000.


The single best way to address the shortfall in retirement savings is to make enrollment in corporate 401(k) plans automatic. The big issue with the plans is not what funds are available to participants nor how they allocate their assets (that’s important too), but that people participate in them and contribute more money than they do.

The benefits of doing so are clear – a good tax deduction, and in many cases free money. Many employers (the percentage has dwindled) still match employee contributions to 401(k) plans up to varying percentages of income. More importantly, it puts people on a path to a better retirement. Despite the benefits, large numbers of Americans still don’t participate in the plans or contribute adequate amounts to them. (For more, see: Voluntary 401(k) Contributions: A Thing of the Past?)

Good Advice, Applied Directly

People could use a push. The automatic enrollment of employees in 401(k) plans at a typical 3% of income may seem patronizing, but it works. Studies regularly show that individuals who are automatically enrolled in retirement savings plans don’t opt out of the arrangement. They save more, earn more on their savings and end up in much better position heading into retirement.

The power of inertia is significant. Plan sponsors with automatic enrollment are now moving to automatically increase the default contribution rate at enrollment and escalate the rate over time. Most companies start at 3%, which will at least qualify participants for the average matching contribution from employers, and raise it from there. Employees can opt of the increases or the plan entirely. The higher the default savings rate, the better the picture gets. (For more, see: Is Your 401(k) on Track?)

Corporate sponsors can and are improving the mechanics of 401(k) plans. The growing use of target-date funds that invest in stocks, bonds and cash based on a participants’ age and investing horizon is a simple solution for people who don’t want to pick investments. For those interested in actively managing their plans, investment choices are expanding and advice and financial planning tools are growing. Many large companies are also sponsoring financial wellness programs that offer more extensive planning services. (For more, see: Is Your 401(k) Administrator Competent?)

The Bottom Line

Savers need all the help they can get, even if it amounts to an offer they can't refuse. That's why the biggest improvement to 401(k)s is auto-enrollment. (For more, see: 401(k): An Accidental Solution to the Retirement Problem.)

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