An Opine: Why Are So Many People Invested in 401(k) Plans?
I read a very interesting article last week from Bloomberg about a noticeable increase in the number of Americans who are contributing money to employer-sponsored 401(k) plans. At first glance, one would think that people are starting to be more proactive and are finally contributing more to their economic futures...but you might be incorrect to think so.
It's no secret that Americans are terrible at saving money for retirement; in fact the average person has only about $10,000 saved at age 65, and that money is supposed to last them for the rest of their lives. Many rely on the hope that social Security will be sustainable, but that just is not the case. Social Security was created at a time when the average life expectancy was nowhere near age 65; if you were lucky enough to live that long, then you got support for the rest of your life. Taxes cannot make up for these numbers, so retirement savings are going to be imperative to care for people beyond their last paycheck.
That being said, there is now a massive trend of employers automatically enrolling their employees into retirement savings plans, whether they knew about them or not:
While this seems like a nice gesture on the part of the employer, this opens up the door for plenty of sketchy investing processes. Firstly, workers do not know where their money is being invested - it could be supporting anything, and potentially something harmful or against the investor's values and principles.
According to Bloomberg, almost 58% of employer-sponsored retirement plans surveyed make their sign-up process automatic, requiring employees to take action only if they don’t want to save. Additionally, automatic enrollment can make a big difference: 89% of workers are making contributions, the survey finds, while 75% make 401(k) contributions under plans without auto-enrollment.
Auto-enrolled employees also save more: 7.2% percent of their salaries versus 6.3% for those who weren’t auto-enrolled. Companies are also automatically hiking worker contribution rates over time with a feature called “auto-escalation,” however this is still far less common than auto-enrollment. Less than a quarter of plans auto-escalate all participants, while 16% boost contributions only for workers who are deemed to be not saving enough.
No matter how you cut it, everything needs to be looked at with skepticism, and understanding where and how your money is being invested is very important. If you or someone you know is investing in an employer-sponsored 401(k) without any guidance, make sure you do something about it -- be proactive and ask questions, and when you leave that employer make sure you have the funds rolled over into your own Rollover IRA.
Keep reading GradMoney for more tips on how to make the most of your retirement funds! Any questions? Send them to us here!