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Over the past decade, employers have increased efforts to enroll workers in retirement savings plans. And they've paid off.
Participation rates are at all-time highs with nearly 8 in 10 employees taking advantage of defined contribution plans like 401(k)s when they have access to them, according to estimates by Aon Hewitt.
Persuading workers to max out their savings in those plans, though, has been tougher.
By 2013, the "vast majority [of employers] offered some type of employer-matching contribution" to encourage workers to save more, according to a recent Aon Hewitt analysis of nearly 150 plans with 3.5 million eligible employees. But even when employers offer matches, employees don't always take advantage of them.
A new report released Tuesday by the independent investment advisory firm Financial Engines found that 1 in 4 employees is missing out on receiving the full company match by not saving enough—leaving an average of $1,336 on the table each year. Or an estimated $24 billion altogether. (Tweet This)
"The match is one of the best deals employer plans offer," said Greg Stein, director of financial technology at Financial Engines, which examined the savings records of 4.4 million retirement plan participants at 553 companies. "It's an instant return on the retirement plan and demonstrates why it's so important to communicate the benefit of participating fully, and how much money is at stake. "
As retirement plan researchers can tell you, unclaimed employer match money is not a new phenomenon. But what's interesting is that one of the very mechanisms for encouraging participation in retirement savings plans may have inadvertently exacerbated the problem.
By the end of 2013, about 65 percent of companies reported having auto-enrollment programs, in which employees are automatically defaulted into a plan with an option to opt out, a feature that became increasingly widespread after passage of the Pension Protection Act in 2006, which provided safeguards for employers that adopted it. (Before the law passed, an estimated 20 percent of employers had retirement plans with auto enrollment; the number has more than tripled since.)
But the default contribution rate for most of those plans remains at 3 percent, the amount many companies adopted when they first added the feature—well below the 10 to 15 percent of annual income that advisors often recommend savers set aside for retirement.
"That's what was written into the code as the example, and suddenly everyone else was doing it. It was the herd mentality, " said Rob Austin, director of retirement research at Aon Hewitt. Its latest report found more than 6 in 10 companies had a default contribution rate of 3 percent or less in 2013.
Meanwhile, most employers with matches offer 50 to 100 percent of as much as 6 percent of an employee's salary. "The problem that we have is often people are defaulted into rates that don't take full advantage of the match, " said Robyn Credico, senior consultant at Towers Watson, a global professional services firm. "And we know most people don't do much once they default. So automatically they're missing out. "
In the last few years, employers have begun taking steps to combat the inertia effect.
Fifty-seven percent of plans that automatically enroll participants also default employees into automatic escalation programs that increase employee contributions annually. That's up from 45 percent of plans in 2011, according to Aon Hewitt.
The plans typically increase contributions by 1 percentage point a year until they reach a cap—and Austin said the cut-off level has been climbing in recent years in an effort to boost employee savings rates. About one-third of companies that offer auto-escalation programs now increase contributions up to 10 percent of employees' salaries, and some have caps that are even higher.
"The theory is that if you turn people off when they hit 6 percent, it sends the message that that's enough to save, and it probably isn't for most people," said Austin, adding that some auto-increase programs now continue until employees hit the maximum they can contribute per year. That's $18,000 this year for a 401(k).
Some companies have also begun raising the default contribution rates in their auto-enrollment programs—sometimes to 10 or even 15 percent, said Austin, "though that's more the exception than the norm."
There's one simple reason for that. "Cost is a big barrier for companies, " he said.
Companies use matching plans to attract new hires in a competitive marketplace, but they're keenly aware that employees often stick with the default option. If their contributions are automatically increased each year, the amount employers will be paying out in matches will surely grow as well.
More common, said Austin, are efforts to encourage employees to save more through education and increasingly personalized outreach. Some employers offer small group and one-on-one meetings to outline the benefits of participation. Others go further, even texting nonparticipants with a link to a streamlined sign-up page.
"Instead of sending the same postcards to everyone, " said Austin, "they say, let's hone in on nonparticipants or those who aren't meeting the match to let them know they're leaving money on the table. "
And it can be substantial. The Financial Engines researchers found employees gave up anywhere from a few hundred dollars to more than $20,000 in employer match money a year. If you factor in the additional money that could be earned each year had it been invested instead, the loss is even greater.
"It's a lot of money," said Stein. "It's enough to make a significant difference to people's quality of life in retirement."