Retirement: 401(k) plans take a different turn

In what marks the broadest effort yet to both simplify retirement savings and get larger numbers of people to save appropriately for life after work, companies are increasingly making 401(k) choices for their employees.

In recent years, companies have been trying to boost participation by automatically enrolling employees in their plans. Those efforts have been successful, and today nearly 20 percent of large U.S. businesses are automatically enrolling employees as opposed to making them sign up on their own, according to new research from Hewitt Associates, a Lincolnshire, Ill., human-resources services firm. That marks the highest level ever and represents a significant shift: For most of this decade, only about 14 percent of companies offered auto-enrollment.

But the latest efforts go beyond just enrolling people: Now many companies are taking the additional step of choosing certain funds as default options and even automatically increasing the amount employees contribute each year. In the past, the default option was typically a conservative money-market account, and employers left it up to workers to determine their contribution level. The goal now is to make sure employees invest the money in a more aggressive, but still prudent, way and thereby ultimately increase the size of their nest egg.

Many of the new default options involve so-called lifecycle funds, which automatically reallocate holdings among different asset classes as an employee ages. Last year, for example, nearly 1,200 employers added to their 401(k) plans lifecycle funds from Boston financial-services company Fidelity Investments, and 850 of those companies made the funds their default option, instead of plain-vanilla money-market funds. And already this year, more than 800 plans have adopted Fidelity's Annual Increase Program, a feature launched last summer that automatically ratchets higher the amount of money a worker saves annually. Other providers, including Charles Schwab & Co. and Vanguard Group, offer similar 401(k) plan features.

Automated 401(k) plans essentially use workers' natural inertia "for their benefit," says Doug Herron, chief financial officer of the Safelite Group Inc., based in Columbus, Ohio, which automatically enrolls employees in its plan and automatically escalates their annual savings.

Automation works by essentially turning the traditional 401(k) model inside out. Typically, workers must opt into a retirement plan and then determine for themselves how much to save, where to invest, when to rebalance their account and when to increase the amount of money taken from every paycheck — decisions they often never address.