Posted on 12/05/2011 10:19:34 AM PST by 92nina
Yesterday, Fidelity Investments released its third-quarter 401(k) data which showed the tremendous effects on personal savings rates that the Personal Protection Act (PPA) had in the five years since it was passed in 2006.
The goal of the PPA had been to shore up employee pension plans, which were often underfunded. The previous law left many employers to choose a Defined Benefits plan, in which employee pensions were pooled together and managed by the company. This created significant problems as pensioners and management frequently disagreed as to whether or not the size of the pool was large enough to cover everyone.
The PPA changed the pension laws to encourage employers to develop Defined Contribution plans. Rather than grouping employees’ pensions, Direct Contribution plans set up individual accounts that could be carried over from one company to another largely tax free. Additionally, auto-enrollment was developed, allowing employers to automatically begin contributing to employee’s retirement accounts. These two effects meant a significant increase in personal savings rates and significantly more protection for retirees.
Fidelity’s quarterly results show that both employees and employers have jumped to take advantage of the new Direct Contribution plans. Now, more than half of Fidelity’s 401(k) participants are in an auto-enrolled plan, compared to 16% in 2006. Auto-enrollment has paid a big role, as only 55% of workers without auto-enrollment participate in savings plans, compared to 82% of those who are automatically enrolled and given the option to leave. This distinction is even more important to younger workers: 76% of Generation Y workers auto-enrolled chose to stay in the plan, verses 20% who chose to opt-in, if not placed in initially.
Why are these results so important? These dramatic increases in enrollment rates show that individual pension plans and auto-enrollment are the keys to increasing personal savings rates. By setting up individual plans and auto-enrolling people in them, people use them as a savings vehicle to retire. This makes the worker self-reliant, rather than being dependent on the company to manage their retirement. This last point is underscored by the asset allocation of the plans: today more than 75% of plans are target date funds, designed to become less risky as the worker grows older. Five years ago, only 12% of funds were target date funds, the remainder being short term, implying that the pensioners were not expecting to use this money for retirement.
These strong results show that the PPA was a rare Congressional home-run. The preference of Direct Contributions and the success of the auto-enroll programs provide a strong model for the future on setting up pensions and retirement programs.
Read more: http://www.atr.org/fidelity-data-shows-success-auto-features-a6624#ixzz1fgWgy1UC
Take this article and others I found to the fight to the Libs on their own turf; put the Left on the defensive at Digg and at Reddit and in Stumbleupon and Delicious
My old company used to match my 401K funds with company stock. Post-Enron (and this law), that policy went away and we were able to invest the company match as we desired.
Investing your livelihood AND large amounts of money in your company strikes me as putting way too many eggs in one basket. If you'd like the option to do that, fine, but diversification = safety.
Glad I got to stick with the old plan - and that I was able to make it to the brass ring.
Defined benefit plans are great if you can get them. It is just that they are not sustainable and they are the reason many older companies have huge pension liabilities.
Any glimmer of a hope of retirement on a defined contributions plan requires savings of AT LEAST 25% of before tax gross earnings each year from day one invested at at least 6% tax free until withdrawal. Almost impossible for most.
The article asks: “Why are these results so important?” Other than the obvious I’ll tell you why... Defined contributions plans 401K are a boondoggle windfall for the money changers of the financial community... they make money by handling money... doesn’t matter if you win or lose.
Congratulations for making it to the brass ring. Does your stipend include inflation? I hope your former employer does not declare bankruptcy like so of the steel and rust belt companies did back in the late 70s and early 80s. The retirement trust fund is BROKE.
The retired union millright/machinist next door to me just had his pention cut $2,200 per month...
Great success. My company had both. They dropped the defined benefit plan for new employees and did not sweeten the defined contributions plan. Been here 28+ years and have the best of both possible worlds. It would be hard to retire on either one alone.
New employees are getting shafted IOW. They need to put about 10% of their income, plus company match, to have any hope of retiring comfortably.
One data point does not make a trend but I rest my case... the trend continues.
We hired guys from the rust belt back in the late 70s. Their father’s were retired and the stories were very sad. LTV steel is on example that comes to mind. They went bankrupt as I recall and turned all of their pension fund obligation over to the Feds. Benefits were slashed terribly.
The only pensions I have seen of late that delivered as promised are government ones. State workers and teachers better brace themselves, municipalities all the more so. The money is gone and we will all feel the pain of over promising and impossible delivery.
Take heart though, there is a new retirement plan in the works. You work to 70 and die. Ain’t it great?
Have a happy day.
The future value of 0.25 per year at 6% interest for 40 years is 38.69. Since your hypothetical benificary will be living on "only" 75% of his or her income, that would leave them with a lump sum of over 51 years of living expenses after forty years.
Actually, saving 6% of your income for forty years (assume constant money, etc) at 6% income should provide you with a life annuity equal to your assumed constant income. I say plan conseratively and save 12%/year starting in year one.
Not enough contingency coverage for me nor inflation coverage. Yes, I have done finance done the worksheets etc. Maybe I’m too conservative or too greedy. I’ve been poor and I don’t ever want to be that way again and especially when I’m too damn old to work my way out of it again!
It is always better to look down that retirement savings road when you are young, the closer you get to the end the scarier it gets. I don’t want to manage to run out of life just as I run out of money.
Good luck.
25% is a lot, maybe even too much.
The irony or bitter part is that the SSA takes about 15% of working Americans income for their entire working lives and promises an annuity worth about half of that and cannot deliver on that promise.
I sincerely hope you are correct because it is a huge mountain to climb and anyone who does has earned a great view from the top.
The 15%? What a shame that over 140 consecutive quarters are mostly just poured down a rat hole. It is a shame and outright theft. I expect to see not one red cent of it ever again. Broke, wasted, stolen, lost. It isn’t there and it isn’t ever coming back.
You are correct, the annuity is about half of what it would be if the money were simply invested in very conservative accounts. It could have bought a very reasonable survivors and long term disability policy plus had money left over at the end of the term for an annuity.
15% of all you earned. It is a lot isn’t it? Most don’t have a clue.
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