A recent brief by the Employee Benefit Research Institute (EBRI) examines the impact of automatic features in retirement plans by using its evaluation model.
EBRI’s Retirement Security Projection Model (RSPM), built in 2003, is used to analyze retirement policy proposals and legislation and its effect on retirement savings for Americans.
“Building on this prior work, the impact of these automatic features is shown for each individual provision as well as for measures used collectively in helping to increase the likelihood of individuals not running short of money in retirement,” stated EBRI in its research.
The brief found that when a defined contribution (DC) plan offers automatic enrollment at a 6% default contribution, the retirement savings shortfall among those with access to a DC plan decreases by 7% and increases to over 10% for those ages 35 to 39. This figure could further increase if an auto-enrollment plan uses automatic escalation, to 9%.
Even automatic portable tools can significantly lower shortfalls for participants. According to the research, plans who adopt auto-portability features could see a reduction in the retirement saving shortfall by over 11% for those ages 35 to 39.
Participants enrolled in plans who adopt auto-enrollment at 6% and who have auto-escalation and auto-portability features are likelier to avoid running short of money in retirement. Their likelihood of evading this increases by nearly five percentage points, with a reduction in the retirement savings shortfall at 16%. For those ages 35–39, the likelihood of not running short of money increases by almost 9 percentage points, and the retirement savings shortfall is reduced by 26 percent, reports EBRI.
Younger participants in these plans are the likeliest to achieve the most retirement income. According to EBRI, those with 27 to 30 years of future eligibility in a DC plan could have their retirement savings shortfall fall by 60%.
EBRI researchers say the findings exemplify the significance behind automatic features, and especially for workers with mid- to lower incomes or enrolled in small plans. While more than one-third of large 401(k) plans provide automatic enrollment, small to midsize plans are less likely to offer the feature.
“Plan sponsors and policymakers need to understand the impact of automatic features, as the amount workers contribute to a DC plan and the likelihood of asset preservation can be increased by better plan design through the use of these features,” pointed out researchers. “The benefits of automatic features are particularly important for individuals who have lower incomes or who have been traditionally less likely to participate in a plan, so all participants can have better outcomes from their participation in a plan.”
SEE ALSO:
‘Automatic IRA Act of 2024’ Enthusiastically Welcomed by Retirement Industry
Key Role of 401(k) Auto-Enrollment, Employer Matching Highlighted in Study
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
