Is Your Employer Saving Your Retirement?

Many Americans face an ugly outlook on retirement, with meager savings and cloudy prospects for Social Security benefits. But there's a ray of sunlight breaking through this gloomy landscape: More employers are starting to "auto-enroll" new employees in 401(k) plans.

Workers can opt out, of course, but many don't. Fidelity Investments, America's top provider of workplace retirement plans, has recently reported encouraging numbers:

• Fidelity now manages almost 2,700 corporate plans with auto-enrollment, up almost 70% in less than two years.
• Even though those 2,700 plans add up to only 16% of all those Fidelity manages, many of its largest employers are among that group, meaning that nearly half of Fidelity's retirement-plan customers are in such a plan.
• More than half of auto-enrolled workers are between ages 20 and 34. This is a big deal, because all dollars plunked into these young people's accounts will have a long time to grow.
• Roughly 56% of participants earn less than $40,000 per year. If you assume an average income of $35,000, and that they sock 6% of that into their plan ($2,100), their employer might match 50% of that ($1,050). A single year's investment of $3,150 can become $34,000 growing at 10% for 25 years. And $3,150 invested each year for 25 years becomes $341,000 at a 10% annual rate of return.

Here's the bottom line on auto-enrollment's effectiveness: In plans without it, only about 60% of workers use their 401(k). In plans with it, that number soars to 90%. Given that few of us can count on pensions or Social Security to provide all we need, taking advantage of 401(k) plans could be crucial.

Low fees matter
There's even more good news! According to the annual report of the Investment Company Institute, a mutual fund trade organization, more than three-quarters of investor dollars in 401(k) plans were in mutual funds charging less than 1% annually. That's a big deal, because a seemingly small gap in fees can actually make a huge difference.

Imagine, for example, that an investor earns a 10% annual average return over 30 years in two funds. The first has an expense ratio of 1.5%, and the other 0.5%. The first fund will turn annual investments of $5,000 over 30 years into $674,000, growing at 8.5%. The second fund, delivering a 9.5% average annual gain, will turn them into $820,000 -- a $146,000 difference!

On target
Better still, many 401(k) plans use target-date funds, freeing workers from having to change their asset allocation over the years. These funds are typically offered by big fund families, and each one is invested in a handful of other funds from the same fund family. Well-respected companies providing such funds include Fidelity, T. Rowe Price, and Vanguard.

Let's look at the Vanguard target-date funds. Most of them are invested in a mix of the same handful of Vanguard funds, just in different proportions. Below you can see some the percentages invested in five Vanguard funds by its target funds dated 2015, 2025, and 2035:

Numbers may not add up to 100% because of rounding or additional holdings.
 
The table shows you how the funds hold different proportions of stocks and bonds according to how close investors are to retirement -- and these proportions are adjusted regularly. You can expect each fund to shed stocks and add bonds as time marches on. Over the long haul, asset allocation can make a huge difference.

All of these factors together make for a much rosier possible retirement for many of us. If you're not already participating in a 401(k), consider doing so.

Learn more
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