There’s just one problem with this approach: you have to do it. Take steps. Sign up. (Yawn, zzzz, maybe Friday unless it rains.)
Around half of American workers have to catch the savings bug all by themselves. They don’t have employer plans to help–no 401(k), 403(b) or anything else. They can arrange to invest as little as $50 a month automatically, through a bank or mutual fund. But who tells them about it? The banks and funds spend their ad dollars on big investors, not on reaching out to the little guy.
The luckier half has an employer plan, handed to them on a silver platter. But even then, around 20 percent of workers don’t sign up, according to various surveys. Usually they’re younger people, or those with modest take-home pay. They’re not clued in to saving for the future, or think they can’t afford to contribute to a plan.
New direction: For them in particular, I’m hopeful about a new direction in 401(k)s. A growing number of companies are putting their workers into the plan automatically. You’re not asked whether you can afford to save. It’s assumed you will save, no matter how little money you earn. Workers can opt out of savings jail, but hardly anybody does–even those with low take-home pay. “Most employees didn’t miss the money,” says Margaret Chabris of 7-Eleven, Inc., which started automatic enrollments in 1997. “They were very pleased to see their statements at year-end.”
That’s why I love forced-savings plans, including Social Security. They’re living proof that anyone can accumulate a nest egg, at virtually any income level. The system just has to be rigged to help.
Around 7 percent of large and midsize employers have added automatic enrollment to their 401(k)s, according to the consultant Hewitt Associates. Many more companies are likely to follow. A few pioneers, such as McDonald’s and Motorola, signed up their employees years ago. But most plans started recently, after an IRS ruling that solved certain technical problems. Further IRS actions last month encouraged autoenrollment for the kinds of standardized 401(k)s that smaller businesses buy; also for 403(b) plans, used by teachers and nonprofits, and 457(b)s, offered to state and local government employees.
When companies switch to an automatic plan, they apply it first to workers who are newly hired. Right away you’re asked to decide how much to contribute to the 401(k). If you do nothing, the company decides for you–typically choosing to invest a modest 3 percent of your pay. Usually the company also contributes to your account–say, by add-ing 50 cents for every dollar you put up.
New hires are perfect prospects for involuntary savings plans, says David Wray, head of the Profit Sharing/401(k) Council of America in Chicago. You aren’t getting your new paycheck yet, so you haven’t built any increase into your standard of living. The 401(k) will be taking mythical money and turning it into something real.
Sometimes employers expand automatic enrollment to pick up current workers who never joined the 401(k). That can be a harder sell. The people already on the job have gotten used to the size of their check and may feel pinched by the loss of $20 or $30 a week. Once they’re in the plan, however, it takes an effort to opt out. Inertia might help these workers save, in spite of themselves.
A big question for employers is where to invest these involuntary contributions. McDonald’s puts them all in company stock–a high-risk choice, although it has been a top performer in the past. Allergan, the eye-care company, and Motorola both chose a balanced stock-and-bond fund (my personal pick, if anyone were to ask). Hewlett-Packard and Freddie Mac went superconservative, with a money-market fund.
Workers in 401(k)s can change their investments around, and raise or lower the amount of money taken out of their check. But people signed up automatically tend to stay where they’re put, says Brigitte Madrian, a professor at the University of Chicago–often because they assume that the company knows best. That’s a lot of responsibility for the executives who create the plan. But even money funds give these workers more than they otherwise would have had, especially where there’s a company match.
Finding help: While I’m on the subject of retirement plans (how’s that for a transition?), let me mention another interesting trend. Low-cost services are developing on the Web to help you manage your 401(k) and IRA. You’re seeing the future for everyday investment advice: rapid analysis by computer, with competition improving its quality all the time.
A favorite of mine is the pioneering Financial Engines (FE). You enter some personal information and the amount of funds in your 401(k). FE advises you which funds to buy and in what amounts. It’s the only online adviser, so far, to give you a decent assessment of risk. You’re shown a range of possible outcomes for your investments, from best to worst, depending on what the future brings. That helps you adjust your allocations to reach the level of certainty you want. Cost: $14.95 per quarter, at financialengines.com.
But FE has new competitors. In January, Morningstar started its own advisory service for 401(k)s. It guides you to a reasonable asset allocation. Then it helps you choose among the funds in your 401(k). Price: $7.95 per quarter, at morningstar.com.
On quicken.com’s site, you enter the name of any one of 1,100 companies, and the mutual funds in its 401(k) pop up. You enter some personal information and get a rundown–free–of which funds to buy. This site touts further, human advice, for a fee.
Everywhere, advice is cheap and getting cheaper. The challenge today isn’t finding good counsel, it’s finding enough money to save.
