Small Business Finance News
This Could Be The Key To Avoiding The Looming Retirement Savings Crisis
Written by Tim Morral
In the United States, hardly anybody saves for retirement, and it's going to be a big problem very soon. But new approaches for encouraging saving are proving effective.
If you own a business and offer a 401(k) plan, you know that many employees don't bother to save for retirement.
To change that, try auto-enrollment.
Employee Benefits Adviser reports that participation in employer-sponsored 401(k) plans is slowly improving, driven largely by auto-enrollment policies undertaken by plan sponsors.
Employers have implemented investment menu design decisions that have helped to move the needle up on the number of people saving for retirement.
Vanguard, which administers many company 401(k) plans, said that in 2014 an impressive 36 percent of plans had implemented auto enrollment, which meant that 60% of newly hired employees participating in Vanguard 401(k) plans were automatically enrolled.
Mind you, this is not just for new employees. About half of Vanguard's plans are now using automatic enrollment for current employees who never participated in the plan.
Jean Young, a senior research analyst with the Vanguard Center for Retirement Research, commented that "Over the past decade, we've seen a meaningful jump in total participation rates. Three-quarters of eligible workers now participate in their employer's plan, up from two-thirds 10 years ago, underscoring the impact of autopilot plan designs."
Additional information can be found in Vanguard's report, available online and entitled How America Saves 2015.
The Role of Employers in Encouraging Employee Savings and Why It Matters
If Vanguard's numbers are representative of a larger trend toward saving, that would be very good for the economy. It's not only that more people are saving for retirement. Vanguard also found that more participants are saving at higher rates than in the past.
The key question is whether other 401(k) plan providers beyond Vanguard are also seeing more businesses push auto-enrollment. We hope they are. According to the Employment Benefit Research Institute's Retirement Readiness Ratings, 41 to 43 percent of Americans are at risk of running out of money in retirement. The burden of supporting them will of course fall on the rest of us. Gulp.
We're already dealing with significant damage from the Baby Boomer generation. The last thing we need is another generation of underfunded retirees.
So, listen up, business owners.
Implement auto-enrollment ASAP for your 401(k) plan and coach your employees on how to save. Vanguard recommends a target savings rate of 12%-15%, including employer match. If your employees don't know that, why not let them know?
Yes, it's on the individual to save for retirement, but a good employer looks out for the best interests of their employees -- even long after they've left the workforce.
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