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This 401(k) Change Could Help 3 Million More Americans Afford Retirement
By Adam Hardy MONEY RESEARCH COLLECTIVE
Automating 401(k) plans could help millions more Americans afford a secure, comfortable retirement.
For many workers, saving for retirement is a chore, given how complex managing workplace plans can be. However, new research shows that automating key administrative aspects of the process could have life-changing benefits for millions of Americans.
By streamlining 401(k)s, the share of account holders who can afford to retire jumps from 62.8% to 67.6%, a recent analysis from the nonprofit Employee Benefits Research Institute, or EBRI, finds.
“When these automatic features … are used together, the impact can be substantial in reducing the likelihood that today’s workers will run short of money in retirement,” Craig Copeland, director of wealth benefits research at EBRI, said in the report. “And if they still run short, it will reduce the deficit in the amount needed.”
Based on Labor Department data on 401(k) participation in the private workforce, Copeland’s findings translate into more than 3 million Americans gaining the ability to fully afford retirement, with many more benefiting from increased savings. Younger workers and people of color, in particular, would stand to gain.
The three key features analyzed in the study are automatic enrollment, automatic contribution escalation and automatic portability. And the good news is that thanks to recently implemented retirement reform legislation, known as SECURE Act 2.0, automated features like these are starting to become the norm.
Here’s how these retirement savings account features can supercharge your nest egg.
Automatic enrollment
One major way to boost workers’ retirement savings, the study shows, is by automatically signing up everyone who’s eligible for a workplace retirement plan. This makes them take action to opt out as opposed to opting in.
By auto enrolling in a 401(k) or similar plan and starting their retirement contributions at 6% of their income, workers are able to increase their savings while reducing the probability of running out of money in retirement — especially for those who are early in their careers, Copeland found.
Overall, about 40% of workers are expected to run out of money in retirement, according to EBRI. Automatic enrollment still benefits them, however, by reducing their savings shortfall by 7%. For younger workers, the savings deficit shrinks by more than 10%.
This automated feature is now required in most cases. As of Jan. 1, SECURE Act 2.0 requires employers with more than 10 employees to automatically enroll their workers into the company’s retirement plan, with a default contribution rate between 3% and 10%.
Automatic escalation
Increasing your retirement savings rate as your career progresses — and salary increases — can have big long-term benefits during retirement. With automatic escalation, the employer increases the contribution rate of the worker by 1% of their earnings each year unless the worker manually chooses a different number.
In Copeland’s model, he assumed a starting contribution of 6% that increased annually until reaching 12%. By automating enrollment and escalation, his research shows many more workers would be able to save enough to cover all their retirement expenses.
For instance, the share of workers projected to fully afford retirement jumps from 62.8% to 65.5% when automatic enrollment and escalation are implemented.
Under SECURE Act 2.0, most employers must now increase their workers’ savings rates in a similar manner, starting at a minimum of 3% until it reaches at least 10%. Workers are allowed to change the savings rate as they see fit. Employers can also use higher default savings and escalation rates.
Typically, financial experts recommend a retirement savings rate of 15% of your annual earnings (including any employer match, if applicable) to afford a comfortable retirement, though most of the workforce struggles to hit that mark.
Automatic portability
According to the financial firm Vanguard, the typical U.S. worker changes jobs about eight times over their career. Each time, if the person has a 401(k), they typically have to roll over the funds into an individual retirement account, or IRA — and that’s assuming they don’t just forget about it.
The manual rollover process can be costly. More than a quarter of workers who do this forget to reinvest the IRA money, a mistake with a $130,000 price tag, on average.
This is a major reason why “automatic portability” is so important to financial experts. The idea is that when you switch jobs, your 401(k) should seamlessly follow you. According to Copeland, the automatic feature is in its “early adoption stage” as new rules from SECURE Act 2.0 are encouraging plans to follow the worker.
If retirement plans were to offer this feature across the board, it could have an outsized impact on younger workers especially, reducing their retirement savings shortfall by 11.4%. Meanwhile, the share of young workers who could afford retirement would increase 3.5 percentage points.
And if all three automated features are combined, the benefits are compounded.
The share of early-career workers who could fully afford retirement would jump by nearly 14 percentage points, the EBRI analysis found. And those who couldn’t save the full amount would see their savings deficit shrink by a staggering 60%.
And Copeland suggests these figures could be on the conservative side, given that his analysis assumed a worker’s contribution rate drops back down to the minimum when switching jobs, instead of staying at their current savings rate. He also does not explicitly account for employer matching programs, when employers match the amount the worker contributes to their retirement account, up to a certain percentage. According to Fidelity, about 90% of retirement savers have some sort of employer-matching benefits.
Given that it’s still early days for SECURE Act 2.0, you won’t likely see the full benefits of widespread automated 401(k)s for some time. For the time being, it’s up to you to monitor your retirement plan to stay on track with your savings goals.
Otherwise, small oversights could add up to hundreds of thousands of dollars of forgone retirement savings.
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Adam Hardy is Money's lead data journalist. He writes news and feature stories aimed at helping everyday people manage their finances. He joined Money full-time in 2021 but has covered personal finance and economic topics since 2018. Previously, he worked for Forbes Advisor, The Penny Hoarder and Creative Loafing. In addition to those outlets, Adam’s work has been featured in a variety of local, national and international publications, including the Asia Times, Business Insider, Las Vegas Review-Journal, Yahoo! Finance, Nasdaq and several others. Adam graduated with a bachelor’s degree from the University of South Florida, where he studied magazine journalism and sociology. As a first-generation college graduate from a low-income, single-parent household, Adam understands firsthand the financial barriers that plague low-income Americans. His reporting aims to illuminate these issues. Since joining Money, Adam has already written over 300 articles, including a cover story on financial surveillance, a profile of Director Rohit Chopra of the Consumer Financial Protection Bureau and an investigation into flexible spending accounts, which found that workers forfeit billions of dollars annually through the workplace plans. He has also led data analysis on some of Money’s marquee rankings, including Best Places to Live, Best Places to Travel and Best Hospitals. He regularly contributes data reporting for Best Colleges, Best Banks and other lists as well. Adam also holds a multimedia storytelling certificate from Poynter’s News University and a data journalism certificate from the Investigative Reporters and Editors (IRE) at the University of Missouri. In 2017, he received an English teaching certification from the University of Cambridge, which he utilized during his time in Seoul, South Korea. There, he taught students of all ages, from 5 to 65, and worked with North Korean refugees who were resettling in the area. Now, Adam lives in Saint Petersburg, Florida, with his pup Bambi. He is a card-carrying shuffleboard club member.