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Fidelity calls for automatic enrollment in 401(k)sPosted by Retirement on: 2005-09-22 08:27:31 in category:
401(k) [ Print | Permalink / 0 Comment(s) ] By Andrew Caffrey, Globe Staff | September 22, 2005 Fidelity Investments wants corporate America and its workers to do a better job saving for retirement, and it's starting with its own house. Beginning Jan. 1, all Fidelity employees will automatically be enrolled in the company's 401(k) retirement plan, a move designed to prod the small percentage of the company's 32,500 employees who haven't yet started a nest egg at work. ''If you force that on people, make it part of what they do every pay period, it will become part of a very successful" retirement system, Fidelity chief operating officer Robert Reynolds said in a speech yesterday morning before the Greater Boston Chamber of Commerce. Reynolds was making a pitch for new measures to increase retirement planning and savings -- ones that would benefit workers in the form of larger nest eggs, and Fidelity itself in the form of more money to manage, and the fees that come with that. Also, Reynolds said 401(k) or other workplace retirement plans should be able to automatically increase employees' contributions as raises and bonuses increase their paychecks -- a feature Fidelity intends to offer its employees -- or raise their contributions each year until they're at least giving the maximum amount that the company would match with its own contribution. Moreover, workers should be steered more aggressively into so-called life-cycle mutual funds, which automatically allocate retirement investments among stocks and bonds based on age and expected years to retirement, said Reynolds. ''We need a new generation" of workplace retirement plans, he said, to replace the pension plans that are vanishing from corporate America. Workers could once count on their employer taking care of their retirement needs. Pensions helped companies retain employees for years, and offered workers a set, stable income in retirement. But increasing job-switching among workers created a demand for more mobile retirement plans, and for employers, rising pensions bills became an expensive and unpredictable obligation that weighed on the bottom line. But while 401(k)s and other worker-contribution plans are becoming the primary source of retirement savings, Fidelity and other specialists said workers are not using them to full advantage to save enough for retirement. A 2001 federal government survey found the median holdings for workers age 45 to 54 was just $37,000. Separately, at current participation rates, payouts at retirement from 401(k) and such plans would replace only around one-quarter to one-third of the income that lower-wage workers earn while working, leaving them to rely disproportionately on Social Security benefits during retirement, Reynolds said. Only two-thirds of workers in corporate plans administered by Fidelity participate in them, according to Fidelity's research, down from 75 percent in 1998 when the stock market was rising rapidly. Among Fidelity's own employees, the rates are much higher. Around 80 percent of new employees sign up for the company 401(k) plan; after a year's employment, when the company match kicks in, participation jumps to 93 percent of workers. When workers do participate in their plans, Reynolds said, they contribute too little, make poor investment choices, do not allocate money across a broad class of investments, and do not periodically rebalance. While an increasingly popular mechanism, automatic enrollment is used by only 19 percent of corporate plans. There are several issues holding firms back, said Jan Jacobson, director of retirement policy for the American Benefits Council, a business trade council. One is that retirement plans fear they would be held liable if the investment decisions they make on behalf of workers end up losing money. Jacobson said the US Department of Labor is expected to issue guidelines about the liability matter by the end of this year. A spokeswoman for the department did not return calls seeking comment. The are also several bills in Congress that would fix the liability matter, as well as a second obstacle for employers. Wage laws in 32 states prevent employers from deducting money from a worker's paycheck without their consent. Massachusetts does not have such a provision, but Connecticut, New Hampshire, Rhode Island, and Vermont do, according to BenefitNews.com. ''There's enormous potential for helping a lot of people prepare for retirement," Jacobson said of automatic enrollment. Just getting people enrolled automatically isn't enough, said Lori Lucas, director of participant research for benefits consultant Hewitt. ''It doesn't turn people into proactive investors. They tend to be fairly passive," she said, by keeping their contributions small and sticking with the most conservative investments. Automatically adjusting contributions upward would fix the former problem, Reynolds said. Another proposal by Reynolds would fix the latter. He said life-cycle funds should be the primary investment option for workers entering a retirement plan, which should yield significantly higher returns than the money market and stable value funds that passive investors often choose. Andrew Caffrey can be reached at caffrey@globe.com. Homepage Please support are sponsors. 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