Auto Pilot 401K
One Less Thing To Worry About
The typical American is short on time. Their day-to-day
activities are occupied with their bills, job, home, spouse, kids,
parents, politics, health, and (if they are very lucky) planning
some leisure time. Planning for a retirement, decades in the
future, is not a priority given the short term worries they have
to contend with. The irony is that those decades can provide
enormous long term benefits to future retirees through the
magic of compounding interest, if only they could spare the
minimal amount of attention towards retirement planning.
Lawmakers were aware of this deficiency and tried to
find a way to encourage greater participation in employersponsored retirement plans, without direct engagement from
the employees. To this end, the Pension Protection Act of
2006 popularized and codified several automatic features for
retirement savings plans. Now, it was easier for employers
to use these automatic features and get employees into the
plan, saving for their retirement at an acceptable rate, and
investing in a properly diversified investment. Employees,
already short on time, have one less thing to worry about and
generally benefit from being guided into the plan without
direct action on their part.
... For participants – the
employees – the benefits of
automatic features are simple:
it is one less thing to worry about.
If participants want to opt-out of
automatic arrangements, it’s not
particularly difficult, but for the
majority of employees, automatic
enrollment and retirement planning
is a net benefit.”
Similarly, auto-increase allows employers to automatically
increase their employees’ savings rates annually. They can
set a predetermined amount, normally adding 1% each year,
to their savings rate. For example, it is very common for a
plan to begin enrolling employees into the retirement plan,
setting aside 6% per year, and increasing that rate 1% per
year until they hit 10% or 12%.
Although they are growing in popularity, these features
haven’t been universally adopted by every plan sponsor. In
this article, we would like to describe automatic features and
to discuss their advantages and disadvantages.
Finally, there are auto investment defaults – qualified
investment default alternatives (QDIAs). When employers
automatically enroll employees into the retirement plan, they
also automatically default them into a plan-specific investment
option. Meghan points out that, for Fidelity, “the majority
To help us, we enlisted an advocate for automatic features,
of our sponsors, roughly 80%, use a target date fund: a fund
Director at Fidelity Investments, Meghan Murphy. By the
that allows a person to be invested appropriately according
end of this article, we hope that plan sponsors will know a
to their age.” We’ve seen similar research which suggests
little bit more about automated features and seriously consider
Target Date Funds are the overwhelmingly popular choice
implementing them.
for QDIAs.
What are automatic features?
There are three classic automated features you might find in
a defined contribution plan, like a 401(k): auto-enrollment,
auto-increase, and auto-investment defaults.
Auto-enrollment is just what it sounds like. Meghan
Murphy explains, “There are several auto-services which
allow employers to au ѽ