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Automatic features are making it easier than ever to have a 401(k). But beware: you may not be saving enough. Don’t get stuck on 401(k) auto-pilot. Take an active role in managing your account.
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.
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.
Also known as “target date” or “lifecycle” funds, these are a common investment choice for auto-enrollment 401(k) plans. Target funds are mutual funds that hold a variety of other mutual funds. They usually include a year in the name, such as Target 2030, and they automatically adjust your balance of stocks and bonds as you move toward your target retirement year. With each year, they decrease riskier investments (stocks) and move toward more stable investments such as bonds and cash.
If your 401(k) plan features auto-escalation, your deferral rate will automatically increase yearly or when you get a raise. The typical escalation is 1% per year. Auto-escalation is a good thing because it ensures that your savings rate increases over time, so you are more likely to reach your retirement savings goals. It’s an easy way to make sure your savings rate keeps pace with your pay raises. You have the right to opt out of auto-escalation, but it is highly recommended NOT to, so you don’t fall behind on saving. *
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