401(k) News

Automatic Enrollment Gets Results

A study by Financial Engines revealed that when existing retirement plan participants were enrolled into a managed account program automatically, 60% stayed with the program, according to a study by Financial Engines.

Automatic enrollment also had a dramatic effect on the health of the employer retirement plan. Before enrollment, only 7% of participants had well balanced, risk-appropriate portfolios. After enrolling all eligible plan participants automatically into managed accounts, 59% of all plan portfolios were well diversified and at the appropriate risk levels within 8 months. This includes participants who stayed in managed accounts and those who declined.

In addition, portfolios that were invested into managed accounts automatically had higher expected growth rates. These allocation changes were projected to increase the expected annual growth of participant portfolios by 91 basis points annually, net of fees.

Jeff Maggioncalda, president and CEO of Financial Engines called the automatic 401(k) “the most significant innovation in retirement since the creation of the 401(k) plan.” Applying these innovations to existing employees accomplishes in months what it would take decades to achieve if it only applied to new employees.

Participants who stayed in managed accounts after being automatically invested were those with lower salaries, lower balances, and lower savings rates. These results demonstrate that automatic investing is an effective method of reaching participants who need the most help, he added. For more information, visit www.financialengines.com.
––––––––––
Bill Would Expose Hidden 401(k) Fees
American workers would get more complete information about fees that could be cutting deeply into their 401(k)-style retirement savings under legislation approved by the House Education and Labor Committee.

By a vote of 25 to 19, the committee passed the 401(k) “Fair Disclosure for Retirement Security Act (H.R. 3185).” It would help workers shop around for the best retirement investment options by providing information on how much in fees is taken from their retirement accounts. Current law does not require disclosure of certain fees. The fee information that is available can be difficult for workers to find and evaluate.

“For too long, companies in the financial services industry have maintained a stranglehold on retirement savings that they didn’t earn and that don’t belong to them,” said Rep. George Miller (D-CA), chairman of the House Education and Labor Committee.

Miller said the issue is particularly important given that increasing numbers of American workers are relying on 401(k)s to help them pay for a decent retirement. Roughly, 50 million Americans now have a 401(k)-style plan. Past surveys have shown that more than 80% of workers don’t know how much they are paying in fees on their retirement savings accounts.

According to the Government Accountability Office, even a seemingly small difference in the fees that workers pay can make an enormous difference in the overall size of their 401(k) account balance. A one-percentage point difference in fees can reduce retirement benefits by nearly 20%.

The version of H.R. 3185 adopted by the committee would do the following:
• Require 401(k) service providers and plan administrators to provide complete disclosure of fees charged on 401(k) plans broken down into four categories: administrative fees, investment management fees, transaction fees, and other fees.
• Help workers understand their investment options by providing basic investment information, including information on risk, return, and investment objectives.
• Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses.
• Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest.
• Give the U.S. Department of Labor the authority to enforce new disclosure rules and fine service providers who violate them.