Setting anything to automatic has its good and bad points. A 2006 law designed to increase retirement savings allows companies to auto-enroll employees in 401(k) plans: A closer look reveals some interesting pros and cons.
First, the upside: Auto-enrollment has definitely brought more people into the system. Approximately 57% of sizable companies now use auto-enroll and report participation rates above 85%. Let's be honest, millions of people might not have saved a cent if they had to proactively opt in to their 401(k) plans. Some plans even allow you to automatically increase the contribution amount each year. That's a smart move and leads us to the potential downsides of auto-enrollment.
Your employer is picking the default auto-savings rate for you, and they often pick 3%. If employees had to act on their own accord, some analyses reportedly indicate people would chose to save at higher rates. Employers say they keep their automatic rates relatively low to avoid having people opt out altogether -- though some consumer advocates allege their real reason is to keep their own contribution costs down. Either way, auto-enrollment likely means you're not being as aggressive about retirement saving as you could be. In addition, it's important to remember having a 401(k) -- auto-enrolled or not -- is no substitute for a comprehensive retirement plan. There's a tendency to think, "Ah, it's all taken care of." If only it were that easy.
My take: Be grateful if you have a 401(k), especially if your employer matches some of your contribution. The days of defined pension plans are over, so this is this best shot many of us have to put money away systematically. If you were auto-enrolled, take another look at your 401(k) and see if you want to adjust the contribution upward now or an a go-forward auto-escalation basis.
Understanding Credit Scores
Credit scores matter -- learn how to improve your score.View Course »