5 Things You Need to Know About Retirement Plan Auto-Enrollment
Auto-enrollment provides a great start, but you may not want to continue on auto-pilot with your retirement savings.
“I’ll do it tomorrow.”
“I haven’t gotten around to it yet.”
“It’s too complicated.”
When it comes to saving for retirement, procrastination is your worst enemy. Auto-enrollment can help, because it doesn't require any action on your part.
What Is Auto-Enrollment?
When you start a new job, you might be automatically signed up for the company's retirement plan, which deducts a certain amount from your paycheck and invests it toward your retirement. In fact, about 60% of retirement plans automatically enroll new hires.*
The benefit: It’s easier than ever to start saving.
The drawback: You might not be on track.
Plans With an Automatic Enrollment Feature More than half of plans have an automatic enrollment feature.
Source: PSCA’s 59th Annual Survey of Profit Sharing and 401(k) Plans, 2016.
Are You on Track?
Two-thirds of automatic enrollment plans increase the default contribution amount over time. However, the initial contibution rate may be as low as 3% and automatic increases may be capped as low as 6%. Therefore, you may want to consider changing your contributions to stay on track with your financial goals.
How Does an Employer Match Work?
Another benefit of participating in your company’s retirement plan is the potential for receiving an employer match. Some employers will make a matching contribution to your retirement account, up to a certain percentage limit.
For example, an employer may match 50% of employee contributions up to 6% of annual pay. So if you contribute 6% of your annual pay to your retirement plan, your employer contributes an additional 3%, giving you a total savings rate of 9%.
This benefit can be important over the long term. If you don’t contribute enough to qualify for your full employer match, you’re potentially leaving money on the table.
How Are Your Contributions Invested?
If you were automatically enrolled in your company’s retirement plan, your employer invests your contributions in a qualified default investment alternative (QDIA), most likely a target date fund. In fact, target date funds are the QDIA for 76% of retirement plans.*
Target date funds emphasize growth when retirement (the “target date”) is years away and become increasingly income-oriented as it approaches. Participants are placed in the appropriate target date fund based on their age and the year they plan to retire and begin taking withdrawals.
Because a target date fund’s asset mix is adjusted to track your retirement objectives, it can be a great solution for investors who don’t want to select individual funds.
If you were automatically enrolled into a target date fund within your company’s retirement plan, you can opt instead to build your own portfolio using the plan’s other fund options.
Target date funds weren’t always so common. In the past, most plans invested contributions in a money market fund when employees didn’t make their own selection.
“Making target date funds a default investment was a vast improvement since there’s likely not enough return from cash to build an adequate retirement base,” explains Jim Lovelace, an equity portfolio manager at Capital Group.
What if You're Not Enrolled?
Automatic enrollment is typically only for new hires. If you opted out of your company’s retirement plan or never enrolled, contact your company's human resources department for guidance. Getting started could be as easy as signing up online or filling out a form to begin building your retirement account.
Learn More at Capital Ideas
Americans have started saving more over the last five years. That’s great news, but still not nearly enough for a comfortable retirement for most workers.