Auto-Enrolled? Four Things You Must Do to Your 401(k)
According to the PSCA's annual survey of 401(k) plans, the average rate of pay participants are contributing to their 401(k) plans is about 5.5 percent (6.6 percent for highly compensated individuals.)
But this is not nearly enough savings for most workers today -- particularly those who are covered solely by a 401(k) plan. Most folks who do not have pension benefits and rely solely on personal savings need to save at least TEN percent of their gross income into their 401(k) plan account during their entire working lifetime, according the National Savings Rate Guidelines for Individuals.
The industry solution to this problem is the "Opt Out 401(k)," where enrollment into the plan is automatic as soon as an employee becomes eligible to join. This takes advantage of inertia: Newly hired employees are automatically enrolled into the 401(k) plan and they have to take an action to discontinue contributing if they do not want to enroll.
One would think that 401(k) plans should have worked this way since they were first rolled out in 1980. But many employers have been reluctant to automatically enroll employees and select a default investment fund because they fear being sued over the decisions they would have to make.
But here's the thing....while being auto enrolled in a 401(k) plan is better than doing nothing, it's not the best strategy for most folks. People who are automatically enrolled into their employers 401(k) plans should consider making these changes:
- Immediately increase contributions to at least the amount that will get you matching contributions from your employer (six percent in most plans). Better yet, increase your contributions to ten percent or more.
- If you are saving less than 10 percent in your employer's retirement plan and cannot afford to immediately increase your savings to ten percent, then activate a feature available in most large plans that will automatically increase your contributions (by two percentage points) each year until you get there. This automatic feature -- called and auto contribution escalator -- can do this for you.
- The default investment for folks who are auto-enrolled is a single fund that's diversified and includes cash, stocks and bonds. But these default funds are not personalized for your specific situation or preferences. For example, if you want to increase your allocation to foreign stock funds, these default funds would not allow you to make this adjustment. If you want to personalize your investment allocation to increase your returns, you will still need to select from the other funds available in your employer's 401(k) plan.
- Finally, monitor the performance of your account every three months and make changes to keep it on balance. Better yet, activate another feature called automatic rebalancing, which is available in many plans, and the rebalancing will be done for you.
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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