Raising default rate on 401(k) contributions would increase retirement security success: EBRI

Most private-sector employers that automatically enroll their 401(k) participants do so at a default rate of 3% of pay. “This study shows that substantial increases in success rates were found for both low- and high-income employees if employers raised the default 401(k) contribution rate to 6% of pay,” said Jack VanDerhei, EBRI research director and author of the report.

EBRI modeling

Using its proprietary Retirement Security Projection Model (RSPM), the EBRI evaluated the impact of raising the default contribution rate on younger workers (with 31-40 years of simulated 401(k) eligibility) to see how many would be likely to achieve a total income real replacement rate of 80% at retirement—within the typical range of replacement rates suggested by many financial consultants.

A key variable in considering the impact of auto-enrollment in 401(k) plans with automatic escalation of contributions is whether workers who change jobs continue to save at their previous (and typically higher) contribution rate, or whether they “start over” in the new job at the typical lower automatic deferral rate of 3%. Under the EBRI modeling, more than a quarter (25.6%) of those in the lowest-income quartile who had previously not been modeled to have a financially successful retirement (under the actual default contribution rates) would be successful as a result of the increase in the starting deferral rate to 6% of compensation.

Even workers in the highest-income quartile would benefit, the EBRI found, although not as much. Just over 18% who would not be successful under the actual default contribution rate would be successful due to the higher 6% default rate.

Source: EBRI press release #988, September 25, 2012.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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