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Is Your Company Using Automatic 401(k) Enrollment?

Monday, November 22, 2010

 

It is no secret that a huge percentage of 401(k) participants are not on target to meet their retirement goals. Some analyses put that percentage upward of 75%. Business owners with 401(k)'s can help decrease this percentage by implementing "Automatic enrollment" into their retirement plan documents. With Automatic enrollment, the employee has to actually “opt-out” of the retirement plan. If they don’t, their paycheck will be deducted a certain percentage, and that money will be invested on their behalf in the company retirement plan. The use of automatic enrollment can help increase workers’ financial health in each of the following areas:

Appropriate Diversification – Automatic enrollment for many plans involves the use of “Age-based” investment strategies. Age-based funds allocate the percentage of stocks and bonds based on the years the participant has until retirement. Younger workers will be invested more aggressively than older workers. I would say this strategy is far superior to what I see from many do-it-yourselfers, who tend to simply invest all of their contributions in whatever mutual funds made the most money the prior year.
 
Taking Advantage of the Company Match - Nothing ruins my day more than meeting with a client who is able to take advantage of their company match but fails to do so. I’ve read reports that have the percentage of employees that don’t take advantage of the full company match as high as 40%. This is unacceptable to say the least. It’s free money!! It’s part of the employee compensation package, a freebie that the company is willing to impart on the staff. Some plans also have a provision that automatically inflates contribution percentages yearly, thereby increasing the likelihood that employees will meet the company match.
 
Younger Employees Get Involved - It’s no secret that the earlier you start saving, the more secure your retirement years will be. Automatic enrollment gets young employees involved in their retirement planning right off the bat. While younger workers typically make less money, even small contributions early on add up after 30 plus years of compounding growth.

The current state of the economy is affecting retirement savings, but just as glaring is the lack of sufficient education for owners and their employees. By implementing automatic enrollment, business owners ensure that employees get involved in their retirement planning earlier and more efficiently.

Dan Forbes is a regular contributor on business financial issues. He can be reached at [email protected]

 

 

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