A Nest Egg That's A No-Brainer

Automatic 401(k)s are taking hold -- and getting employees to salt more away

When his oil refinery in Big Spring, Tex., changed hands in 2000, Alton Fields, a 58-year-old engineer, cashed out his 401(k) and invested the money himself. The new owner, ALON USA, offered its own 401(k), but Fields never bothered to sign up. "At my age, I thought I was smart enough to put my money in the right place," he says.

But this year ALON changed its plan for its 260 workers. It now automatically enrolls them, signing them up to contribute 3% of pay unless they take the trouble to opt out. ALON also hired Principal Financial Group Inc. (PFG ) to provide one-on-one investment advice to employees. That was a big change, since under the old plan, workers had to sift through 11 different mutual-fund options on their own. Today Fields is back in a 401(k) big-time. He bumped up his contribution from 3% to 10% after one paycheck, and now he and his wife feel more comfortable about retirement. "This is going to be the nest egg we need," says Fields.

ALON's new automatic enrollment 401(k) is part of a sea change in employer attitudes toward retirement. Washington has allowed such plans since 1998, but only 14% of large companies embraced the trend as late as 2003. Now a survey by benefits consultant Hewitt Associates suggests that figure could soar to 59% next year.

What accounts for the switch? New government regulations have helped, and consultants have been aggressively marketing the changes. In addition, as companies continue to drop traditional pension and retiree health coverage for new hires, they see automatic enrollment 401(k)s as a way to help employees make up the difference. Boosting enrollment by low-paid workers also helps employers get out from under federal rules that can limit contributions by higher-paid managers if 401(k)s aren't used equitably throughout the company. Among the companies that have shifted to autopilot plans: J.C. Penney, IBM (IBM ), and Motorola (MOT ). "We're seeing a lot more interest across the board," says Lori Lucas, Hewitt's director of participant research.

Automatic enrollment is just the first step. Companies also are automatically increasing worker contributions over their careers, defaulting workers into "lifestyle" mutual funds, and offering more investment advice for employees. Taken together, these changes could alter America's chronic personal savings shortfall. In fact, the new savings could end up being just as important as all the changes under discussion in the high-profile Social Security debate. The reason: Many U.S. workers underuse 401(k)s, a key way many save for retirement. Fully two-thirds of workers on company payrolls sign up for 401(k)s, but many start too late and don't save nearly enough for a comfortable retirement.

HAND-HOLDING

Indeed, the median balance of the country's 60 million 401(k)s is just $50,000. And a staggering half of households headed by 50- to 59-year-olds have $10,000 or less in their accounts. As a result, "there's a quarter to one-third of families that are not even in the game," says Brookings Institution economist William G. Gale. Automatic enrollment could change that. While most Americans want to save more, they are often overwhelmed by all the decisions they must make: how much to set aside, how to adjust their portfolios as they age, and so on. "Decisions create indifference and confusion, and when people aren't sure what to do, they don't save," says Stephen P. Utkus, principal at the Vanguard Center for Retirement Research.

The new opt-out systems take much of the decision-making off employees' shoulders. Under ALON's old 401(k), only about 40% of the company's workforce signed up, says Eric Nystrom, ALON's manager of benefits and payroll. Now 80% are participating in the retirement plan, he says. Studies show that is typical of automatic enrollment, with overall participation for new workers jumping from 49% to 86%.

The biggest benefit may be getting employees to start saving early. Today it can take as long as 10 years for workers to get around to signing up for a 401(k), losing critical years of investment returns. Even when they join, many fail to set aside enough for their old age. To deal with that problem, some plans, such as Philips Electronics North America's, automatically boost worker contributions each year.

The new plans hold employees' hands on investment choices, too. In early versions, workers defaulted into overly conservative money funds. Now, employers are beginning to steer them into so-called lifestyle funds, which may invest 90% of a 25-year-old's assets in equities but automatically reduce stock holdings to 50% by retirement.

Some companies, like ALON, provide workers with online help or hands-on investment advice from a financial planner. A few other corporations are rolling out yet another version: managed accounts, in which workers make no investment choices at all. They simply turn over their money to a professional manager, which invests their assets as it would with a traditional pension plan. There's another benefit from such advice: Outsiders can encourage workers to lighten up on company stock, something corporate managers are loath to suggest. At J.C. Penney Corp., (JCP ) for example, Financial Engines Inc. recommends that most employees trim their company stock exposure to 20% or less.

All this help comes at a price to workers, however. While many outside advisers provide management or advice for annual fees of 0.2% to 0.4%, others charge as much as 1.5%. Still, autopilot 401(k)s look like the future of corporate-based retirement savings. Many low-wage employees still will depend heavily on Social Security. But for middle-class Americans, saving for old age is becoming more and more automatic.

By Howard Gleckman in Washington

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