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What Employers Want to Do When You're Not Looking

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Many employers want to make a crucial decision for you. That might seem like an infringement on your liberty, a violation of your rights, or at the very least, incredibly annoying. But in this case, it's actually a good thing.

The fuss in question revolves around your retirement nest egg. As pensions grow increasingly endangered, more and more of us must shoulder the responsibility for our own financial futures. Our employers are helping us out via 401(k)s and similar retirement plans, but for most of us, that's far from enough.

The bad news
For one thing, 401(k) plans won't guarantee you enough to live off in retirement unless you save aggressively and invest effectively. It's not sufficient to plow a lot of money into your account if you're averaging a paltry return. If you save $10,000 per year for 20 years, but you stick it in a zero-interest checking account, all you'll have at the end is the same $200,000 you saved. However, it's also not enough to earn great rates of return on modest contributions. You need both.

Worse still, many workers are not participating in their plans at all. According to the 2010 Retirement Confidence Survey, 27% of American workers have saved less than $1,000 for retirement (excluding the value of their homes or pensions), while more than half have saved just $25,000 or less.

The good news
Fortunately, we don't have to face a bleak future. Save and invest well enough, and you can end up quite comfortable. But taking that action can be hard for many of us procrastinators to get around to doing.

Enter those power-happy, dictatorial employers. A survey of 50 large companies that offer defined contribution retirement plans such as 401(k)s found that 63% would like to see participation in the plans become mandatory. And 98% would include automatic plan enrollment in an ideal plan.

Already working
That's not a new idea. Many companies have been enrolling new workers in retirement plans by default, unless they opt out. This has generally been well-received and effective, but it often doesn't go far enough, since the starting contribution rates are often too small.

Still, even a little improvement is worthwhile. A Schwab study found that among companies that automatically enrolled employees, participation rates were 15 percentage points higher. And among those companies that automatically increased contribution rates over time, 83% of participants maintained the increased amounts.

Behold Chile
The nation of Chile offers an inspiring example of how much further we might go in this direction. The country requires employees to contribute 10% of their income or more toward their retirement. Workers have choices about how much risk they take on with their money, but the government keeps them from being way too risky (or not risky enough). Risk is reduced over time as employees approach retirement, and then funds are converted into guaranteed annuities. Go ahead and call that a nanny state, but it's likely to leave its citizens much better off than the average American worker.

Mandatory participation in retirement plans for American workers could be a powerful improvement over our status quo, but only if it's robust enough to help workers invest sufficiently and effectively. Rather than fighting this expansion of your employer's power, you and your nest egg might want to embrace it.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Charles Schwab is a Motley Fool Stock Advisor selection. The Motley Fool is Fools writing for Fools.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2010, at 11:58 PM, markfox wrote:

    I really like your article regarding financial planning and thought maybe you readers would be interested in a free retirement planning calculator called Nest Egg Software www.NestEggSoftware.com

    It allows you to change things like retirement year, annual retirement income, and return rates for different baskets of money and see the results instantly. Here is a quick start guide video" http://www.youtube.com/watch?v=lANFS7By9i0

    Do run through quick overview of the software:

    http://nesteggsoftware.com/blog/2010/04/retirement-planning-...

  • Report this Comment On December 01, 2010, at 11:05 AM, RobertC314 wrote:

    "The country requires employees to contribute 10% of their income or more toward their retirement."

    Sounds a lot like what social security was supposed to be. Hats off to a combination of corrupt and brain-dead politicians for screwing that up.

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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