401(k) auto-escalation gets another boostNews added by Benefits Pro on June 5, 2014

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By Lisa Barron

There’s no disputing that automatic enrollment features in employer-sponsored 401(k) plans can greatly boost retirement savings.

Offering the latest evidence of that notion are the folks at Vanguard, who ran a pilot of the company’s Enroll Now system at a large employer and found that nearly six in 10 employees who joined the company’s 401(k) plan also chose to automatically increase their savings by a small amount every year.

A study reported last month in Science magazine says that 56 percent of companies offer some kind of auto-enrollment program, up from 19 in 2005.

Enroll Now divides the enrollment procedure into three parts; participants decide how much to save per paycheck, whether to increase that amount each year and by how much, and which investments to choose.

See also: 8 things you need to know about automatic features

The research, which was conducted from August to December, found that 59 percent of the employees who used Enroll Now chose to automatically increase their savings annually. According to Vanguard’s models, a participant earning $40,000 who contributed 4 percent a year and who chooses an annual contribution increase of 2 percentage points could save an extra $100,000 over 20 years.

“With longer life expectancies and decades spent in retirement, it is more important than ever for American workers to save adequately for retirement. By providing participants with a simple, pre-set and one-click decision, Enroll Now should enable more employees to easily take advantage of their workplace retirement benefit because they’re not overwhelmed by having to determine how much to save and which funds to invest in,” said Rebecca Katz, principal of Participant Strategy and Development at Vanguard.

New York Life has also found a strong reception for auto-solution among its plan sponsor clients. Seventy percent of its Retirement Plan Sponsors’ clients auto-enroll and, of that number, half auto-enroll into managed savings, the company said.

See also: Plan design can limit impact of automatic savings programs

With the help of auto-increases, in fact, a worker’s account balance at retirement could increase by more than 100 percent, according to Vanguard, which based its calculations on an average worker who starts saving at age 25, has an annual salary of $35,000, annual raises of 3 percent, an employer match of 50 percent of the first 6 percent contributed, and continued savings through retirement at age 65.

The worker, for example, who takes four years to enroll and saves on average 6 percent annually would have an account balance at retirement of $600,655, while a worker who has annual auto-increases of 1 percent until reaching 10 percent would have an account balance of $1,246,454 at retirement.

T. Rowe Price has jumped on the auto-solutions bandwagon as well, saying that research has shown that setting up automatic increases can have a profound impact on retirement savings.

Originally published on BenefitsPro.com
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