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Sizing up Auto-Enrollment

While many people investing in a 401(k) are opting for the convenience of auto-enrollment, it’s also deflating savings rates. According to data from Aon Hewitt, employees who are auto-enrolled in their workplace 401(k) plan save less across all salary ranges.

What’s the reason? “They tend to be defaulted into the plans at lower savings rates” than if left to their own devices, says Dan Campbell, who presented the Aon Hewitt data at the recent EBRI Policy Forum in Washington, DC. The majority of individuals who are auto-enrolled default at a savings rate of 3% — while those who enroll on their own determine their own savings rates and often strive to fully match their employers’ matching contributions.

Aon Hewitt’s conclusion: While auto-enrollment has had a very positive effect on participation rates, the combined effects of the economic downturn and the spread of auto-enrollment have not fared well for employees’ savings in general. EBRI’s Nevin Adams wrote about this issue earlier this week on NAPA Net, pointing out that many workers will be saving more because their initial savings choice was automatic — and that picking up from that starting point is where a retirement plan advisor can make a big difference.

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