First Thing to Do if You're Auto Enrolled in 401(k)
A few days ago I wrote about how Automatic enrollment in 401(k) plans affects workers savings rates.
But the default settings for savings rates on auto-rolled 401(k) accounts are too low to accumulate a meaningful retirement nest egg. If you are auto-enrolled in your 401(k), there are some things you must do to get your 401(k) on a faster track for growth.
Increase Savings to 6% or More
For most workers their employer's 401(k) plan provides employer-paid matching contributions when employees contribute, typically up to six percent of pay.
People who are automatically enrolled should immediately increase their contributions to an amount at least enough to get the full matching contributions from your employer which is six percent in most plans.
Increase Savings to 10% or More
But even this is not enough savings for most workers today - particularly those who are covered solely by a 401(k) plan. Today most workers in this situation need to save and contribute at least TEN percent of their gross income into their 401(k) plan account, according to a report on National Savings Rate Guidelines.
Activate Automatic Contribution Escalator
If you can't afford to immediately increase your contribution percentage to ten percent, then set it to automatically increase each year to reach a contribution rate of at least ten percent in two to three years. If your finances get tight in a particular year, at the very minimum, you should always contribute enough to collect your employer's matching contributions.
Make Catch Up Contributions
This year, the maximum annual contribution a worker under the age of 50 can make to their 401(k) plan account is $16,500. Workers age 50 and over in 2011 can also make additional Catch Up Contributions of an additional $5,500, for a total contribution of up to $22,000 each year to their 401(k) plan accounts. Also be careful to do this again when you change jobs. When you change jobs and are automatically enrolled in your new employers plan, these additional catch-up contributions will not be activated automatically. You need to activate these additional catch-up contributions in your new employers plan.
Check back in a few days when I'll write about the changes folks who are auto-enrolled should make to their investment fund mix.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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