Putting Auto Features to Work

Ah yes—nudges like auto enrollment, one of the key reforms in SECURE 2.0 designed specifically to get more workers contributing to their 401(k)s. In the overwhelmingly bipartisan SECURE and SECURE 2.0 retirement-savings packages, Congress included many provisions intended expressly to further increase participation.

In his recent “blueprint for greater 401(k) success,” Empower President and CEO Edmund Murphy also stressed the importance of auto features that overcome bad behavior. Murphy penned the blueprint in light of criticism from those who wish to eliminate or significantly alter the 401(k), explaining it’s best to show how it is effective and offer some areas for needed improvement.

“The great innovation built into the 401(k) system is that it helps individuals overcome behavioral hurdles through the use of automatic savings features. Automatic paycheck deferrals, auto-enrollment and auto-escalation are features that have proven to work at keeping savers on track for retirement,” Murphy wrote.

He added that about 62% of businesses with a 401(k)-plan used automatic enrollment in 2020, up from 46% a decade ago, according to the Plan Sponsor Council of America. Another study found that 92% of new hires were still saving in the 401(k) plan three years after being automatically enrolled; in plans with voluntary enrollment, just 29% were still saving.

“Every retirement plan must have auto features,” Murphy said.

Add Ted Benna, the acknowledged “father of the 401(k),” to those believing mandates are needed to improve retirement saving habits. He said as much in a lengthy recent article in The New York Times titled, “Was the 401(k) a Mistake?” that falls into the category of attacks on defined contribution plans.

The article quotes Benna as saying that that the voluntary approach, in which companies decide whether they want to sponsor 401(k)s and employees decide whether they wish to participate, is leaving too many gaps. “He thinks all companies above a certain size should have to offer employees 401(k)s or alternative retirement-savings options,” the article says, adding that starting next year, employers that establish new 401(k) plans will be required to automatically enroll workers in those plans per SECURE 2.0 (and further adding there is still no obligation, however, to actually provide the plans themselves.)

Nevertheless, it must be noted that federal and state lawmakers have made great strides in their efforts to increase access to retirement plans at work, and that work is leading to an explosion of small plans through state mandates, tax credits and expanding access to pooled employer plans. And they are tackling the decumulation issue with SECURE and SECURE 2.0 provisions making it much easier for employers to offer high quality annuities as part of a 401(k) plan, which many are calling a game-changer.

And the incentives don’t stop there. ICI noted additional provisions such as small employers are provided enhanced tax credits to create a new ‘Starter’ 401(k) plans; the ability of employers to contribute matching funds to 401(k)s against student loan repayments, and the new “Saver’s Match” converting the Saver’s credit into a government matching program for lower- and middle-income Americans; increased savings opportunities for part-time employees; and allowing for new emergency savings accounts.

“The part of the system—the 401(k)s and IRAs people like to take sticks to—is the part that is working, and the improvements Congress passed recently will only help more Americans to save for a secure financial future,” ICI’s Holden and Brady said.

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