Savings Rates and 401(k)s

Over the years economists discovered that people would save more for retirement if 401(k) plans set a default initial savings rate instead of providing there would be no savings rate unless the employee selected one. There’s a lot of inertia in people. Many people will leave their contribution rate at the default, because they don’t have to do anything. A few years back the government acquiesced in the research and provided that employers were allowed to set an initial contribution rate, provided employees can change it.

But don’t think your employer picked the default savings rate after studying the issue and deciding that is the appropriate rate. Most employers pick 3% as the default savings rate, and they apparently choose it because that was the number used in examples in the regulations that authorized default savings rate. You should save at a higher rate, and probably a much higher rate. Read the story and some other details here.

When companies with 401(k) retirement savings plans enroll new hires automatically, many set a default contribution rate of 3 percent of salary. Why not 4, or 5.5, or 6? Are companies saying you can afford to retire if you save just 3 percent of your salary a year?

Hardly. Less than 22 percent of large companies surveyed by Towers Watson even provided 401(k) participants with a suggestion about how much to save. Of the companies that did, 39 percent recommended 10 percent or more. Increasingly, retirement experts say 15 percent is more like it.