Recent laws have made it easier for companies to automatically enroll their employees in the company 401(k) plan. According to a 2013 study, 56% of American companies now offer some kind of auto-enrollment program, up from 19% in 2005. This has resulted in more people participating in 401(k) plans, which is a good thing.
But don’t think that just because your 401(k) is automatic, you can sit back and relax.
- The contribution levels pre-set by your plan do not guarantee you a secure retirement. They are just a start. You are the one who needs to manage your own retirement planning.
- Make sure you know the exact terms of your automatic 401(k) – how much of each paycheck is being contributed, and to which funds. You have the right to override these pre-set decisions and make changes to fit YOUR life situation.
How auto-enrollment works. With auto-enrollment, you will automatically be enrolled in the company 401(k) plan when you become an employee. You have the right to opt out of the plan. Your contribution level (also called the “deferral rate”) will be pre-set by the plan, usually 3% of each paycheck, and it may automatically increase each year. This rate may not be enough to get the employer match, and, for most people, it will not be enough to grow a substantial nest egg for retirement. To reach your long-term retirement goal, you will most likely need to increase your monthly contributions.
With an automatic plan, the mutual funds you invest in will also be predetermined for you. Often a plan will lean toward safer investments such as money market funds, which don’t offer big growth. You can change your investment choices within the plan to better suit your retirement goals.