If your employer sets up
automatic 401(k) enrollment,
it must choose a default contribution level that applies to all employees who are enrolled in the autopilot program. For instance, if your employer sets the default level at 3%, that’s the amount of pretax salary each automatically enrolled employee will contribute to his or her account in the plan. Companies may also choose to escalate the percentage deferred from their employees’ accounts — say by one percentage point per year, up to 6% by the fourth year of participation. In that case, the employers must offer a company match for a percentage of the automatic contributions.
Opting out
In most cases, if you’re a new employee at a company that uses automatic enrollment or if your company starts an autopilot program and you’re not already contributing to its
401(k),
you must indicate within a certain time (usually 90 days) whether you want to participate in the plan. Otherwise, you’ll be automatically enrolled. Your employer will let you know exactly how long you have to decide.
If you miss the deadline, you’ll still be able to get out of automatic enrollment, but depending on your company’s plan, you may have to wait before changing the default investment settings selected by your employer. At that time, you may decide to stop contributing to your company’s 401(k) plan altogether, or you may decide to increase or decrease your 401(k) contribution and
allocate
it to a different set of investments than your employer has chosen for automatic enrollees. For example, if your employer sets the default level to 3%, you may adjust your contribution up or down.
If you do opt out, 100% of any automatic contributions, plus any earnings on those contributions, will be returned to you. You won’t have to pay any early withdrawal penalties, but you will have to pay taxes on the full amount at your regular tax rate.
A word to the wise
While many consumer advocates are optimistic about the potential of automatic enrollment to help people build their retirement savings, it’s important not to let automatic contributions lull you into a false sense of security. Studies by the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) suggest that lower income employees who have 3% of their pretax salaries automatically contributed to a money market fund would be able to replace about 37% of their salaries upon retirement. When the automatic contribution is raised to 6% and invested in a target date fund, it’s estimated that they would be able to replace about 52% of their incomes. While that’s much more than they might otherwise have had, it’s still less than they would need to ensure a comfortable and secure retirement.
