The design of many 401(k) plans is about as cutting edge as flip phones, Walkmans and dial-up Internet access. While some employers -- especially the biggest ones -- have upgraded from 1990s-era plan designs, few are embracing state-of-the-art features that encourage workers to save more for retirement.
And, unlike tech-savvy consumers lining up for the newest smartphone, most retirement plan sponsors don't appear interested in an upgrade. After surveying 1,500 plan sponsors, Cogent Research’s Linda York accused employers of widespread "complacency."
Two of the best ways to encourage savings, retirement experts say, are to automatically enroll employees in 401(k) plans when they're hired, and to automatically increase how much they save each year. While employees can opt out of the plan or stop the increases, automating the process vastly boosts the number of employees who use the plan and how much they sock away.
Adoption of such tools has slowed to a crawl even though, according to Cogent, 61 percent of companies don't auto-enroll employees, and 89 percent don't automatically increase contributions.
The goal is "a much more aggressive level of saving encouragement," said Iwry.
Enter Obama administration retirement guru Mark Iwry. Plans should automatically enroll not just new employees but long-serving veterans who never signed up, Iwry said at a recent conference. And rather than starting employees with contributions of 3 percent of their salaries, they should start at 6 percent or more, he says. Those changes get very little "blowback" from employees, he insists. Cogent's York agrees.
The goal is "a much more aggressive level of saving encouragement," said Iwry, and to change the typical 401(k) "from a 'do-it-yourself' to more of a 'do-it-for-me plan." To encourage employees to save even more -- north of the 10 percent they'll need to save each year for an adequate retirement -- employers might use their "bully pulpit," Iwry says, while also restructuring employee match programs to reward higher contribution rates.
Who Will Pay?
One big stumbing block to Iwry’s ambitious plans is who will pay for them. Even though Iwry says there are few extra costs from these plan improvements, auto-enrollment does raise costs for employers who match workers' contributions. Thus, as a Center for Retirement Research study shows, auto-enrolled workers get a lower level of matching contributions. Companies are also dealing with the lingering affects of the recent recession: According to American Investment Planners, the number of companies matching 401(k) contributions has fallen 7 percent since 2009.
In defense of employers, the regulations on 401(k) are voluminous and complex, making plan administrators rightly cautious about experiments. Another sticking point, York says, is simple inertia. Why try something new when there are so many other things to worry about? That's the same sort of inertia that prevents individual workers from making all these changes themselves in the first place.
This essay originally appeared in Bloomberg.com's weekly personal finance newsletter, Wealth Watch. Sign up here.