To encourage the participation in 401(k) plans and increase retirement security, employers are allowed to automatically enroll their employees into a 401(k) retirement plan when the employee meets the plan’s eligibility requirements. If the employees do not want to participate in the 401(k), they will have to opt-out of the program.
While auto-enrollment is certainly easier than completing forms, you shouldn’t assume what you’re saving is enough for you to meet your retirement goals. Many plans start auto-enrolled participants at a 3% of compensation deferral rate. This deferral rate is outlined in the plan’s documents.
You do not have to stay with the default contribution percentage. A majority of plans have secure web portals that allow employees to log in at their convenience to make changes to their account. Your plan’s rules determine how frequently you can adjust your deferrals. However, you can change your deferral to zero at any time.
You should read the summary plan description to determine if your company offers matching contributions. It is generally a good move to increase your contributions to meet the employer match, as this is essentially free money the company is giving you. You should revisit your contribution amount as your salary increases. Your cash flow should allow you to contribute more to your plan.
Plans that have an auto-enrollment feature also have a qualified default investment alternative, which is the default investment choice for participants who do fail to make investment decisions. Often these are target date or balanced funds that offer capital appreciation. Depending on your investment time horizon and your risk tolerance, you may want to redirect some of your investment toward more aggressive or conservative options.
Your company is required to provide you information and disclosures about your investment options, which you should read carefully before investing. You may also inquire with your employer about education meetings provided by the plan’s service providers.
Even if you are automatically enrolled and you choose to keep the default investment choice, remember that 401(k) plans are not a “set and forget” investment. You should review your investment options at least once a year to make sure they are still appropriate for your age, risk tolerance and financial goals.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.