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Employees Welcome 401(k) Automation

April 6, 2005
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In an encouraging sign for employers, a new survey shows that employees who are not participating in their 401(k) plans would welcome automatic features that force them to do so.

According to The 15th Annual 2005 Retirement Confidence Survey released by the Employee Benefit Research Institute and Mathew Greenwald & Associates, 66 percent of nonparticipants say that if their employer offered automatic enrollment, they would be very or somewhat likely to remain in the 401(k) plan. Fifty-five percent say automatic step-up features, which automatically raise workers’ contributions by a percentage when they receive a pay raise, would make them more likely to contribute to their plans.

This is good news for employers, many of which have in recent months been adding or considering adding automatic features to their plans. According to a recent Hewitt Associates survey, 59 percent of employers say they are interested in offering automatic enrollment this year and 47 percent say they are looking at adding other automatic features this year. 

Some 401(k) plan sponsors have been hesitant to add automation to their 401(k)s for fear of being perceived by employees as too paternalistic, but this survey should act as a sign to go forward with adding these features, says Mathew Greenwald, president of Washington-based Mathew Greenwald & Associates. “Employers that move affirmatively in this direction will get recognition from employees that they are doing something in their employees’ interest,” he says. “There is a tremendous room for employers to do more and it doesn’t cost any money.”

Liking lifecycle funds
The study, which is based on telephone surveys with 1,253 U.S. workers, also finds that employees want lifestyle and lifecycle funds in their 401(k) plans. Sixty-five percent of nonparticipants say they would be more likely to participate in a plan that offered a lifecycle fund, which periodically rebalances between stocks and bonds to create a more conservative investment fix as the employee approaches retirement. Forty-nine percent say they would be more likely to participate in a plan that had a lifestyle fund, or target-risk fund, which invests in an allocation of stocks and bonds but does not include rebalancing.

Lori Lucas, director of participant research at Hewitt, says this is another good sign for employers. She notes that more employers are leaning toward adding lifecycle funds over lifestyle funds. Thirty-eight percent of 401(k) plans offer lifecycle funds, according to Hewitt.

The survey may indicate that employees would invest in lifecycle and lifestyle funds, but what employees say and what they do are two different things, warns Michael Weddell, a retirement consultant at Watson & Wyatt Worldwide. “Does this mean that employees are taking the initiative to find out if lifecycle funds are available in their plans?” he asks. “It’s nice to know that they like it, but we are not sure that adding lifecycle funds will increase participation.”

The study also finds that 64 percent of employees say they would use a financial adviser if their employer offered it, while only 45 percent say the same about online advice and 28 percent say the same about telephone advice.

The study does not ask, however, whether employees are willing to pay for advice, Weddell says, adding that face-to-face advice can range around 100 basis points, or 1 percent of the participant’s assets invested. “They aren’t willing to pay $40-$50 for online advice,” he says. Dallas Salisbury, president and chief executive of Employee Benefit Research Institute, says, however, that some financial advisers and mutual fund companies will provide advice at low or no cost. 

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