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Big Business Encourages Employees to Fail at Retirement Planning

When it comes to helping solve the retirement savings crisis, an alarming percentage of American businesses are saying: Not My Job. According to a new AARP survey most of Corporate America has shrugged off adding new features to 401(k)s that would encourage employees to save more for retirement. This despite the fact that fewer than 13 percent of pre-retirees say they are very confident they will be able to retire comfortably; a well-founded fear given that just 23 percent of pre-retirees have savings that could generate a sustainable income stream of at least $10,000 a year in retirement.

Now I want to be clear, we're not talking about asking big businesses to cough up more money for pensions. The issue here is simply whether businesses are willing to make a few strategic tweaks to their 401(k)s that would nudge, cajole and lead employees to set aside more of their salaries for retirement savings. But so far, the majority of big businesses are content to let employees fail at retirement planning

So Much for A Helping Hand
It's widely accepted that two ways 401(k) plans can help employees help themselves is to 1) get more people participating via auto-enrollment and 2) encourage employees to save more by instituting an auto-escalation feature that periodically increases a participant's contribution rate.

Big business isn't exactly falling over itself offering this help according to AARP's Automatic 401(k) Plans survey:

  • Less than half of large businesses have added an auto-enrollment feature to their 401(k)s. Among those without the feature, less than 30 percent are even considering adding it in the future.
  • Less than 30 percent of large businesses have an auto-escalation feature that periodically raises the employees contribution rate.
  • Among firms that have stepped up to the plate and instituted auto-enrollment the average default contribution rate for employees is set at just 3.2 percent That is less than one third what would be considered a baseline minimum rate to have a shot at building an ample retirement kitty. Yet there seems to be little concern for ramping up the default rate. Eighty-three percent of business said they would not entertain increasing the default rate by two percentage points. Granted, a 2 percentage point increase can be a jolt for employees. But when firms that said no to 2 percent were asked to consider a 1 percentage point increase in the default contribution rate it sets for its 401(k), the response was no better:

Likelihood You Would Raise Default Rate by 1 Percentage Point

Source: AARP

It's as if most businesses want credit for doing something, but have no interest in doing the right thing.

No Help for the Most Tenured Workers
What's even more depressing is that so far the vast majority of plans that have added automated features are gearing it just at new employees. Only 8 percent of employers with auto enrollment for new hires say they expect to expand the feature to all employees.

Why the Foot Dragging?
To be sure, some companies are concerned about the added cost of adding these features. Nearly 40 percent of businesses that don't have auto enrollment (and 28 percent of those that do) say they don't want to add auto-escalation because it would require the company to pay out more in matching contributions. But that's not the core stumbling block. Among firms with auto enrollment, 70 percent said they didn't want to add automatic escalation because they don't think their employees would like it. And another 50 percent said they were concerned their employees would find it confusing.

You know you have a seriously flawed retirement system when the provider is more concerned about "feelings" than solid leadseship. The whole construct of the "auto" features is opt-out: The employee always has the right to opt-out. But the failure here is that the employer doesn't have the interest, or gumption to opt-in its employees in the first place.

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