When a company sets a default contribution rate, most employees adhere to it—usually this has to do with the human tendency to stick with the status quo, but occasionally it’s because some employers match contributions made up to that default rate. So, the number a company chooses—even if it’s only 1 percentage point different from the norm—can have powerful effects on workers’ long-term wealth.
The most common default rate is 3 percent, and The Wall Street Journal reported last week that an increasing number of companies are going beyond that, effectively encouraging their employees to set aside more of their incomes. Ten years ago, 27 percent of companies set their default rate at 4 percent; now, it is 39 percent. (It should be noted that the Journal’s sample is sort of abnormal. The paper looked at employers that use Vanguard, a company known for charging some of the lowest fees in the asset-management industry. A company that uses Vanguard is probably more sensitive to employees’ retirement needs in general.) State, local, and city governments have almost always used systems like this to get employees to share the cost of their employers’ pension plans, and now it appears that private companies providing 401(k) plans are catching up.