Making 401(k) hard to resist is seen as secret to saving


Your Money

September 12, 2004|By EILEEN AMBROSE

ALAN GREENSPAN is rarely accused of being blunt, but the Federal Reserve chairman's recent forecast for Social Security was painfully clear:

The number of those over age 65 will nearly double in three decades, and there won't be enough future workers to support the kind of benefits promised today. Social Security must be changed - and soon - to give pending retirees enough time to make adjustments of their own.

"If we delay, the adjustments could be abrupt and painful," Greenspan said.

It's not the first time that Greenspan has sounded such an alarm, and others have been making dire predictions for Social Security for years. Still, you might think the Fed chairman's latest bleak assessment would encourage workers to save and invest more.

Highly unlikely, retirement and behavioral finance experts say.

"Surveys reveal that a majority of 401(k) participants say they are not saving enough. So people understand they have this problem," said Richard Thaler, a professor of behavioral science and economics at the University of Chicago. "The secret to getting people to do something about it is to make it easy for them to do something about it."

Thaler is among a growing chorus of financial experts arguing for changes in the 401(k) so it works with human behavior, rather than against it.

Instead of leaving it up to workers to make all the decisions - whether to enroll, how much to save and where to invest - employers should adopt a 401(k) that automatically makes those choices for employees, experts recommend. Additionally, as workers get pay raises, their contributions to the 401(k) should automatically be bumped up, too.

Of course, workers who want to choose their own investments and savings rates would be free to do so. But workers who don't want to participate in the automated plan would have to make the effort to opt out, experts say.

"In essence, it gets inertia to work for us instead of against us," said Bert Dalby, a principal with the Vanguard Group, which started last year to offer such automated features to the 401(k)s it administers.

Workers didn't used to have to worry about these issues. Many companies offered traditional pensions, where the employer assumed responsibility for saving and investments and workers in retirement knew they would receive a monthly check for life based on their wages and years of service.

But in the past 20 years or so, the shift has moved to defined contribution plans, such as the 401(k), where workers must set aside a portion of their paycheck and decide how to invest the money. So far, many workers haven't met the challenge.

Despite facing a longer retirement than any previous generation, a sizable number of baby boomers and younger workers don't save. Just under 70 percent of eligible workers participate in their employer's 401(k), reported Hewitt Associates, a Chicago benefits consultant.

According to the most recent government figures, the median value of retirement accounts among those 55 to 64 was $55,000 in 2001, hardly enough to retire on for decades.

"There's a lot of procrastination and inertia associated with investing," said Wayne Gates, with John Hancock Financial Services in Boston.

Companies are cautiously climbing on board the idea of automatic enrollment. About 14 percent of nearly 500 companies surveyed last year offered it, double the number in 1999, according to Hewitt.

Employers that once feared being held liable for giving investment advice to workers now worry they will be blamed if employees don't save enough or make the wrong investments, said John Doyle, vice president of marketing for T. Rowe Price Retirement Plan Services in Owings Mills, which administers 401(k)s for 500 companies. About 10 percent of them have automatic enrollment.

And companies are encouraged by regulators' support of some automated features, including gradually increasing worker contributions in plans.

"We are seeing in the past year a higher comfort level [among employers] of playing a more active role," Doyle said.

Employers began automating 401(k)s several years ago by enrolling new workers in plans and having them opt out if they didn't want to belong.

There's no question that automatic enrollment increases participation, particularly among younger workers who are less inclined to save for a retirement that's decades away. About 94 percent of workers participate in plans with automatic enrollment, about 20 percentage points higher than plans without it, Doyle said.

Typically, companies steer 2 percent to 3 percent of workers' wages into the plan and park the dollars in a money market fund or other ultraconservative investment so employees won't lose money.

The problem, companies have found, is that workers often stay at those low contribution levels and maintain investments that are far too conservative to reach retirement goals.

To combat that, other automated features are being added.

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