Tuesday, July 12, 2011

Ill-Defined Contribution Plan

For things that aren't broke to be mended
May bring consequence oft unintended,
As the craftiest plan
Of mouse and of man,
Economic'ly, time and again did.

Tess Vigeland of public radio's Marketplace Money recently highlighted the surprising finding of a study first published in The Wall Street Journal: Given a default option of saving a minimal amount in their 401k plans, many employees will take it, rather than setting aside the greater portion of earnings they would have saved on their own initiative. This is too bad, because automatic enrollment at 3% of salary has been widely introduced by defined contribution plan sponsors since being mandated in a 2006 federal law. Statistical modeling has shown that many participants opt for the default, 3% withholding rate when, left to their own devices, they might have "maxed out" their retirement savings.

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