Retirement Savings Accumulation Boosted by PPA

The Pension Protection Act’s safe harbor provisions for auto enrollment and auto escalation 401(k) plan features “is likely to have a very significant positive impact in generating additional retirement savings for many workers,’ according to researchers from the Employee Benefit Research Institute (EBRI).

In a new Issue Brief, researchers Jack VanDerhei and Craig Copeland discuss results of their simulations which indicated that even under the most conservative assumptions for auto escalation of contributions, switching 401(k) plans from voluntary enrollment to auto enrollment will generate significantly higher accumulations for many, but especially for low-income workers. While their results in aggregate favor automatic enrollment, the researchers did find that the more highly paid will not benefit from auto features as much as their lower income counterparts.

According to the report, the median 401(k) accumulations for the lowest-income quartile of workers (assuming all 401(k) plans were voluntary enrollment) would only be 0.1 times final earnings at age 65. However, the researchers said, if all 401(k) plans are assumed to be using auto enrollment, the median 401(k) accumulations for the lowest-income quartile jumps to 2.5 times final earnings under the most conservative auto escalation assumptions and 4.5 times final earnings under the most beneficial assumptions.

Even for the top 25% of workers (when ranked by 401(k) accumulations as a multiple of final earnings), the research found the impact of the PPA’s auto plan features is significant. The multiple under a voluntary enrollment scenario is 1.8 times final earnings, whereas auto-enrollment provides multiples ranging from 6.5 to 10.4, depending on auto escalation assumptions, according to the report.

Of course those with more years left to accumulate savings will also see a greater benefit than those closer to retirement. The researchers found that when results are aggregated across all income categories, the increase in the value of 401(k) accumulations at age 65 as a multiple of final earnings for those currently ages 25 – 29 would be approximately 2.4 to 2.6 times final salary by switching from voluntary enrollment to automatic enrollment.

Despite the significant positive impact of these PPA provisions, when researchers compared the results of their simulations with previous EBRI research, they noted that even with the large increases in accumulations likely to be generated for workers due to these provisions, it still may not be enough for the appropriate level of income replacement in retirement.

The EBRI Issue Brief is located here.