Think your 401(k) is on autopilot? Think again! A groundbreaking study in behavioral economics has revealed that those handy auto-enrollment and auto-escalation features in your retirement plan might not be the savings superheroes we once thought they were.
Here’s the scoop: while these automatic features are still giving our nest eggs a boost, they’re not packing quite the punch we expected. Why? Well, it turns out that many of us are treating our 401(k)s like piggy banks, cracking them open when we switch jobs. About 40% of workers cash out their plans when leaving a job, which is a bit like taking one step forward and two steps back on the road to retirement.
The numbers tell an interesting story. Auto-enrollment is now estimated to increase our average 401(k) contributions by 0.6 percentage points over our careers. That might not sound like much, but it’s a far cry from the 2.2 percentage points we thought we were getting. Over a 40-year career, that difference could mean saying goodbye to over half a year’s worth of income in your golden years. Ouch!
So, what’s the takeaway? While auto-enrollment is still doing a solid job of getting us to participate in 401(k) plans, there’s definitely room for improvement. Experts suggest bumping up the default savings rates to 7-8%. And here’s a pro tip: next time you switch jobs, resist the urge to cash out that 401(k). Your future self will thank you!
