Oct. 4 (Bloomberg) -- Automatic enrollments in U.S. employer-sponsored 401(k) plans are helping younger workers save enough for retirement, according to Financial Engines Inc.
“We do see some improvements on portfolios coming at the younger stages,” said Jeff Maggioncalda, president and chief executive officer of the Palo Alto, California-based company founded by William Sharpe, a Nobel laureate in economics. “This study proves that automatic features are working.”
About 52 percent of workers under age 30 eligible to automatically enroll in an investment option through their employer have the appropriate risk and diversification for their age to put them on a better track for retirement, compared with 12 percent of employees in that age group without access to such a feature, according to the study released today. Financial Engines analyzed about 2.8 million participants from 272 company plans.
The company uses a proprietary computer model that measures fund expenses, historical performance and an investor’s risk level to recommend how a worker should allocate contributions.
The Department of Labor encouraged employers to automatically enroll workers into retirement-savings accounts after Congress passed the Pension Protection Act of 2006. The most popular default investments are target-date funds, which move money from riskier assets such as stocks to more conservative investments such as bonds as an individual approaches retirement. They attracted $45 billion last year, according to Morningstar Inc., the Chicago-based researcher.
Target-date funds may have more risk than savers think, said Jessica Flores, managing partner of Fiduciary Compliance Center LLC in Rydal, Georgia, a consulting firm that advises employers with as much as $4.5 billion in retirement plan assets. The underlying investments in funds may include riskier assets such as high-yield bonds to improve returns, she said.
Legislators and regulators have scrutinized target-date funds’ fees, disclosure and risk structure after some investors lost as much as 41 percent in 2008, according to Morningstar, while the Standard & Poor’s 500 Index dropped 38 percent.
About 72 percent of Americans won’t have enough saved when they retire, according to the Financial Engines study, which looked at an individual’s 401(k) balance and estimated Social Security benefit as well as stock market performance. The projections don’t include other investments a worker may have such as an individual retirement account or real estate, Maggioncalda said.
“The bright spot that we see is for younger people starting out,” said Maggioncalda. Those workers are more likely to have been automatically enrolled into their investment selection, he said. In addition to target-date funds, that may also include a balanced fund or professionally managed account.
The study said about 67 percent of participants in 401(k) plans across all age groups need to improve their diversification and adjust risk levels to reach retirement goals. The report also said that the recession has hurt savings rates. About 39 percent of workers aren’t contributing enough to their accounts to receive the full employer match, up from 33 percent in 2008.
Financial Engines is an independent registered investment adviser that provides advice online to 7.4 million 401(k) investors through employers that have hired the company, including about 120 businesses in the Fortune 500. The firm, which went public in March, also manages about $30 billion in retirement assets.
“You’re putting a lot of responsibility on the individual” now that more workers save for retirement through 401(k)s rather than traditional pension plans, said Carrie Schwab-Pomerantz, president of Charles Schwab Foundation, which sponsors financial literacy. “Individuals have to not only make the effort to save, they have to make the effort to choose the investments as well.”
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