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Thought-Provoking Thursday: Auto-Sweep Helps Retirement Savings

According to new data out of the Employee Benefit Research Institution’s annual Retirement Confidence Survey, Americans have as much doubt in their ability to retire as ever before. Only 13 percent say they’re “very confident” they will be able to retire, while 28 percent are not confident at all — a figure, EBRI says, is the highest they’ve seen in the 23 years they’ve been doing the survey. However, related research by New York Life reveals that there is hope for better savings habits, and it relies on a new kind of automation: auto-sweeping.

Auto-sweeping is the corollary to auto-enrollment: it’s the act of going back and enrolling employees into the company’s 401(k) plan, even if they’re not new hires, and even if they’ve opted out of participating in the plan in the past.

“Auto-sweeping is something relatively uncommon that’s becoming more common, just as auto-enrollment was uncommon 10 years ago,” said Dave Castellani, CEO of New York Life Retirement Plan Services. Of New York Life’s 500 plan sponsors, 68 percent use auto-enrollment, while only 10 percent are using auto-sweep. Yet, Castellani is convinced it will quickly catch on. The numbers suggest he might be right.

New York Life found that 80 percent of people who were swept back into their company’s plan stayed in; for those who drop out and are swept in again a year later, 70 percent remain in. These figures support EBRI’s research, which found that nine out of ten employees not saving for retirement would in fact do so if their employer were to auto-enroll them.

“What’s interesting to me is number of participants who thank the plan sponsor for doing this,” Castellani said. “Two things happen: they realize the actual payroll deduction is not that punitive, and they see the match. You see a very rapid effect of compound growth.”

These findings come on the heels of new research on auto-escalation – in which plan participants choose to have an automatic, annual increase in the percentage of their pay put towards retirement — that found that people are significantly more likely to increase their contributions if the increase happens automatically. Specifically, T. Rowe Price found that only eight percent of participants who are offered a choice will go for the annual increase, while 65 percent of participants in an auto-increase program will leave that increase in place.

If auto-escalation and auto-sweeping bring new meaning to “set it and forget it,” will they also help move the needle on retirement confidence and give EBRI happier numbers to report in years to come? Castellani says this will largely depend on the age at which employees are auto-swept. “If I’ve never ever participated in an IRA program and I’m 52 years old, that’s a problem,” he said. “However, if I’m 22 years old, and I finally get auto-swept in at 26, now there’s a lot of time for accumulation. Over a long time, the retirement confidence is going to go up. Not a dramatic short-term turnaround, but within more years, there will be more confidence.”