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Eager to improve employee use of 401(k) plans, an increasing number of companies in the United States are introducing automatic features that require less worker involvement and make these plans more like defined benefit plans. Hewitt research shows that one in five plan sponsors now offer automatic enrollment, up from 14% in 2003. In addition, nearly 20% of plan sponsors offer, or are planning to offer, contribution escalation in the next 12 months. This feature automatically increases an employee's contribution to a target percentage over time.

"Many plan sponsors want employees to take more responsibility for their retirement saving," says Lori Lucas, Director of Participant Research at Hewitt Associates. "But they also recognize that they can't expect every worker to be a savvy, or even competent, investor. Automating the 401(k) plan allows plan sponsors to better achieve their goal of shifting ownership of retirement saving into the hands of the employee."

One of the most encouraging trends noted in the Hewitt study of 450 large plan sponsors is growing adoption of lifestyle funds as the default investment option for automatic enrollment. Studies show that inertia and poorly defined investment preferences tend to prevent employees from actively making changes to automatic enrollment defaults. Too often, plan sponsors with automatic enrollment choose as a default a stable value or money market fund with typically lower-than-expected long-term rates of returns, according to Lucas.

"Employees get considerably more value out of a retirement plan when automatically enrolled in a lifestyle fund that is based on their years left until retirement and includes the appropriate mix of equities and fixed income vehicles. Together with contribution escalation, these funds help employees build their retirement savings faster without having to actively invest," says Lucas. This approach is geared to help the hardest-to-motivate demographics in retirement planning, such as younger, lower-tenure, and lower-salary workers, she notes. While overall employee participation in 401(k) plans is about 70%, the rate for these workers typically hovers closer to the mid-40s.

Lucas notes, "Workers feel overwhelmed with the responsibility of saving for retirement. Automating the 401(k) plan and having a lifestyle fund default allows employees to maximize the value of their plan—without requiring a lot of time or effort on their part."

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