Employers can help their employees' mindset by getting them started with the right deferral rate through auto enrollment. Employers who have used auto enrollment have generally started their employees at 3%. Employers need to review their plan designs and consider adding auto enrollment at 6%, or add auto escalation to start employees saving an appropriate amount for retirement.

Research has shown that automatic enrollment in 401(k) plans can have a great effect on retirement income adequacy. The impact of automatic contribution rate increases coupled with automatic enrollment has been less clear. New research from the Employee Benefit Research Institute seeks to fill that void. The study analyzed the likely increase in "successful" retirements for participants in plans with automatic enrollment and automatic deferral rate increase features if all such plans set their default deferral rate at 6% of pay. The results indicated significant increases in success rates for both low- and high-income employees, assuming no change in opt-out behavior.

A "successful" retirement was defined as a 401(k) account balance large enough, when combined with Social Security benefits, to provide a real income replacement rate of 80%. Researchers looked at employees in the lowest-income quartile in EBRI's Retirement Security Projection Model. They found that when actual default contribution rates were considered, only 62% would have a successful retirement. But, if plans adopted a 6% default rate, the percentage of successful retirements rose to nearly 72%.

Employers cannot rely on the auto features in plans to do all the work for employees. They need to help build the education level of participants in an effort to get them positioned to take advantage retirement resources.

It turns out the decisions participants make about financial matters, including putting off saving and investing for retirement, are deeply rooted in psychology, according to studies of investor behavior.



5 changes participants can make

1. There's no time like the present. Many people procrastinate when it comes to making financial commitments.

2. Delayed gratification can boost happiness. If you remember being a kid and saving your allowance money to buy a special toy, then you will understand intuitively that immediate gratification doesn't always buy happiness.

3. Think small investments, make them regularly. The key is to start early and to keep contributing regularly to your plan.

4. Stay in your comfort zone. Unquestionably, the financial crisis of 2008-2009 took a major toll on Americans' retirement savings, in some cases cutting the value of nest eggs in half. The market volatility that followed this period revealed just how nervous many investors became about owning stocks.

5. Set realistic expectations. In investing, there are very few, if any, guarantees. That's why nearly all investors are best served by diversifying their portfolios with a mix of stocks, bonds and cash investments. It's also important that as your retirement date approaches you think about dialing back your exposure to riskier investments, such as stocks.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Securities offered through LPL Financial, Member FINRA/SIPC.

Ludwig, ChFC, AIF, CRPS, is a financial adviser with LHDretirement and EBA's new retirement columnist. Reach him at atjludwig@lhdbenefits.com.

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