If
you’re eligible for your employer’s 401(k)
plan, you might find yourself participating in it without
actually signing up. This could happen if your employer
automatically enrolls you in the plan.
Automatic
401(k) plan enrollment is becoming more common now that
Congress has passed new laws as part of the Pension Protection
Act of 2006 to encourage its use. It’s estimated that
within five years as many as half of the companies sponsoring
401(k) plans will move toward using automatic enrollment
features as a way of encouraging their employees to save
for retirement.
If your workplace uses automatic enrollment, sometimes called
autopilot enrollment, you can always choose not to participate
in your company’s plan. But you must follow your employer’s
rules to opt out of the plan or a percentage of your gross
income will be deducted from your paycheck and invested in
a retirement account in your name. Your employer has a certain
degree of flexibility to choose how much of your income to
defer and where to invest it — although you always
have the opportunity to increase or decrease the percentage
and change the way the money is allocated.
Most employers let you opt out in writing, or you may be
able to use an online enrollment tool.
One of the reasons automatic 401(k) enrollment is becoming
popular is because it encourages retirement saving among
people who otherwise might not save, particularly young people
and lower-income employees. In fact, surveys suggest that
considerably more workers will contribute to 401(k)s if companies
set up accounts for them rather than if employees are left
to enroll on their own. And because traditional pensions are
becoming much less common, participating in a defined
contribution plan, such as a 401(k), is more important
than ever. In fact, for many people, it may be the easiest — if
not the only — way to set aside pretax income for retirement.
A big boost
Automatic 401(k) enrollment is still relatively new, but
it could reshape the retirement plan landscape. How? Because
left on their own, 30% of people don’t enroll in
their company’s 401(k), despite being eligible. According
to the Employee Benefit Research Institute (EBRI), that
figure translates to about 12 million people. But a recent
survey finds that when they’re automatically enrolled,
as many as 95% of eligible employees participate in 401(k)s.
