Automatic for the People
Thirty years into the messy and somewhat ad hoc experiment of handing over retirement planning responsibility to employees, the employees are saying no thanks. Only 25 percent said they are very confident in their ability to push the right retirement planning buttons. So it's no surprise that a majority of 401(k) participants are receptive to fully automating their 401(k): from enrollment, to setting the initial contribution rate, adjusting the rate periodically, rebalancing, and yes, even making the asset allocation decisions.
Nearly six in 10 respondents said they would welcome being relieved of asset allocation duties. Interestingly just 10 percent of young workers (age 22-44) and 15 percent of older workers (45-64) had an outright negative view of handing over responsibility for asset allocation. Basically, workers are ready to flip the 401(k) construct and move everything to automation. For the minority of folks who still want total control, an easy solution is to just switch everything to the opt-out system: the employer/plan automates everything, but the employee always has the ability to opt-out of any preset default.
Employees Slowly Catching on
The good news is that plan sponsors are increasingly moving toward automating their 401(k)s. It's not simply a case of corporate altruism; employers are well aware that the better prepared older workers are to retire at an appropriate age, the less likely it is that they will want to overstay their welcome and set off some intergenerational antagonism in the office.
Hewitt Associates' annual survey of 401(k) plans shows a sharp pick-up in automation features:
- Nearly 60 percent of plans now use auto-enrollment, up from 19 percent in 2005.
- Forty-four percent offer auto-escalation of contribution rates, up from nine percent in 2005.
- Almost 50 percent provide automated rebalancing, compared to 26 percent in 2005.
Interestingly, auto asset allocation, while popular with employees is under a bit of Washington scrutiny. Nearly seven in 10 plans in the Hewitt survey default participants into a target date fund. But both Congress and the SEC are taking a hard look at the target funds given that many pre-retirees were surprised when their target funds lost 25 percent (or more) during the 2008 bear market. Some lawmakers and regulators think that's a signal the allocations in some target funds are too risky. In fact, that's typically not the problem. What's risky is thinking that when you retire at 60 or 65 you should be completely out of the stock market. The target funds are set up to get an investor through their retirement, not merely get the investor to their retirement date. The difference between the two can be 20 years, or more. That is, if you retire at 65 your average life expectancy is about 20 years (meaning half will live even longer.) The fact that a pre-retiree portfolio lost 25 percent in a year when the S&P 500 was down 37 percent doesn't seem wrong to me. Unpleasant, yes. What Washington can help "fix" is communicating the longevity issue to pre-retirees, rather than instructing the pre-retiree target funds to become overly conservative. An even better use of Washington's time would be to finally push through 401(k) fee disclosure. And while they're at it, they could give Ameicans a huge retirement assist by following through on last year's House bill that would mandate every 401(k) plan include at least one low-cost mutual fund.