On long driving trips, I love to use cruise control. I just set the speed once and stop worrying about how fast I'm going. Of course, I still need to steer, and watch out for other drivers.
Automation can be good for retirement saving, too -- but only up to a point.
Employers have been adding more automatic features to their retirement plans ever since the Pension Protection Act became law in 2006. Some of that law's provisions aimed to boost participation in workplace retirement plans by encouraging employers to enroll new workers automatically in retirement plans, and by making it easier to offer target date funds, which re-balance portfolios to a more conservative stance as retirement dates approach.
Automatic features began gaining ground immediately. About half of companies that offer defined benefit savings -- mainly 401(k)s -- now auto-enroll their employees, and one-third of those that don't are thinking of adopting it, according to a survey by Towers Watson, the employee benefits consulting firm. Ibbotsen Associates reported that assets in target funds hit $256 billion at the end of 2009, up from $159 billion at the end of 2008.
Employers are worried that about the ability of their employees to save for retirement. Hewitt Associates reports that 80 percent of companies that suspended or reduced their 401(k) matching contributions in 2009 plan to restore them this year. Hewitt's survey also found rapid adoption of other automation features, including automatic portfolio re-balancing and automatic contribution escalation. A growing number of employers also are adding online investment guidance for employees or managed account options, which allows employees to turn over investing to a money management professional.
These are positive developments. Automatic enrollment has boosted participation rates, and target date funds can eliminate dangerous asset allocation errors made by consumers, who tend to stay overweight in riskier equities as retirement nears.
So, automation has the potential to boost retirement security for millions of Americans. But if you're in a plan offering these features, don't assume automation alone will get you to the destination of a secure retirement without some manual driving on your part.
Get the details on what you still need to do at RetirementRevised.
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