6% the new standard for 401(k) Savings

Nearly six in 10 401(k) plans are automatically enrolling their workers in their plans, with 36% contributing 6% or more of their workers’ wages to the plans.

That 6% contribution rate is double what it was a decade ago, according to the Vanguard Group’s 2024 How America Saves report. Auto-enrollment usage with 59% of plans is also up from 36% in 2014. Additionally, a full 77% of companies with 1,000 or more employees now automatically enroll their workers in their 401(k).

Additionally, 60% of workers default to a 401(k) with a contribution rate of 4% or higher, up from 39% 10 years ago.

For years, companies resisted paying workers a rate higher than 3% for fear it would burden them. They also resisted contributions of 6% or higher, at the risk of appearing too paternalistic.

Indeed, only 33% of Vanguard’s 401(k) plans now automatically enroll workers with a contribution rate of 3% or less, down from 56% in 2017.

“Initially, a lot of companies sentenced people to 401(k)s at 2% or 3% of salary, and that’s where a lot stayed,” Dave Stinnett, head of retirement strategy advisory at Vanguard, tells the Wall Street Journal. “Now, companies are trying to get workers into the plan, saving as aggressively as possible.”

In fact, the report showed that even in the face of inflation, Americans continued to save a record 11.7% in their 401(k)s in 2023, on par with 2022.

This breaks down to average contributions of 7.4% from employees alone and employers kicking in an average match of 4.3%.

This record savings rate is largely due to saver inertia, with nearly 70% of auto-enrollment plans now pairing it with automatic annual contribution escalation of 1% or more each year, according to Vanguard.

A 2007 study by researchers at prominent universities, including Harvard, found that roughly the same number of workers automatically enrolled in a 401(k) with 6% savings rates and 3% quit.

Verizon Communications is one company that began enrolling workers at a 6% contribution rate in 2022. Workers didn’t blink, says Kevin Cammarata, vice president of benefits. Verizon’s intent was to help its employees take advantage of its generous 100% to 6% match of employee contributions, he says.

“It was good that we got them into the plan, but they weren’t optimizing the game,” says Cammarata.

Today, 91% of Verizon’s 68,000 plan participants are saving 6% or more of their paychecks in a 401(k), up from 78% in 2020.

Some companies are raising the bar even higher, with the Boston Consulting Group recording new hires at 10% of salary since 2010.

Financial advisors recommend that savers save 12% to 15% of their paychecks to give themselves a fighting chance of a comfortable retirement.