A growing number of workers in the United States are being auto-enrolled in their company’s 401k plans. The goal of auto-enrollment is to increase the likelihood that the employee will remain in the plan and save for retirement because instead of going through the process of opting in to the program, the employee would have to opt out – and there’s evidence to show that the opting out is unlikely to happen.
Success rates for keeping individuals in a program where an opt-out situation is in place have proven positive elsewhere. Take the 2012 study performed on organ donation programs in Austria and Germany, for example. Austrians are automatically put on the rosters of the country’s organ donation program, meaning the participants must opt-out if they don’t wish to be organ donors. The participation rate is over 90%. Germany, on the other hand, has an opt-in program for organ donation, with participation under 20%. The two countries are located right next to each other, and have similar cultures. It can therefore be argued that the difference in program participation is the opt-in system versus the opt-out system.
So, what does organ donation have to do with the 401k plan you’ve been automatically enrolled in? Well, employers are anticipating that a similar effect will take place, with retention and participation for those who are auto-enrolled remaining high. In fact, a recent Bureau of Labor Statistics report showed that auto-enrollment increased 401k participation by 48% among new hires and 11% overall. This is a good thing on many levels:
- The employee starts saving money for retirement as soon as they’re eligible for the plan – and this is very positive. It’s been reported that many people have mental roadblocks when it comes to saving, one of them being the hassle of enrollment. They procrastinate, and ultimately, may never get around to enrolling.
- Employees get interested in saving and planning for their future. With a plan, they’re able to better anticipate what they want retirement to be, and how much they’ll need to save to get there.
- Having more participants in the program reduces the administration cost for each participant of the plan, and for the employer.
- Auto-enrollment (and high retention in the plans) benefits the overall future for all, helping to bridge the gap between how much people need for retirement and how much they save. Saving early and consistently will help families live in retirement, especially if Social Security is no longer available some day.
In general, being auto-enrolled in your company’s 401k is a good thing. But like any investment, it’s not something you should set and forget about. It needs to be managed to ensure it fits with your risk tolerance and goals for retirement, and monitored to keep it balanced. You’ll also want to be sure that as you’re able, you increase your contributions as your salary rises over the course of your tenure with the company. Typically, once you’re auto-enrolled, you’ll want to take the following into consideration:
- How much does your employer contribute to the program? Make sure that you’re contributing at least as much as the employer match so that you get the benefit of those additional dollars going into your 401k.
- What type of fund have you been put into? In many cases, younger workers are put into a Target Date fund, which tends to be more aggressive than the average investor’s risk tolerance. Whereas a Target Date fund can be a 90/10 equities to bonds ratio, the average investor leans more towards a 60/40 ratio.
- Become familiar with the details of your plan. The financial advisor who administrates the plan may be available to help you learn more about it. If not, consult with an independent financial advisor who can look at your overall financial picture, assess your risk tolerance, and make recommendations.
- What are the fees? Take a look at what you’ve been enrolled in, and what the fees associated with those funds are. Explore whether there are lower cost options that may be a good fit for you.
- Don’t be afraid to ask questions. When it comes to your retirement savings, there is no such thing as a stupid question. If you’re looking for a specific type of fund and you don’t see that it’s available, ask to get it. If you’re not sure how the fees work, ask for clarification.
- Aim for saving 10% of your salary – as soon as you can. If you start saving when you begin working your first job, your money may have more time to grow and compound.
Many of the auto-enrollment 401k plans are highly automated, complete with online calculators to help you visualize where you’re going at your current savings rate, and where you could be under increased savings scenarios. These calculators provide a baseline for savings and estimated forecast, and they’re very valuable because they help people get excited about saving for retirement, and give them good data to work with.
Have you recently been auto-enrolled in your 401k plan and not sure what to do next? The financial advisors at Krilogy Financial® can help you make sense of it all, and help you make educated decisions about your investments, including your 401k.