How to Make Your Company's Retirement Plan Work For You

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If you've started a new job recently -- or at least since 2006 -- you may have found that your new company automatically enrolled you in its 401(k) plan. Why 2006? Because that's when Congress passed the Pension Protection Act of 2006, which encouraged companies to automatically enroll employees in 401(k) plans and cleared up some of the legal issues surrounding the practice. Prior to this, only about 17% of all companies that offer a 401(k) enrolled employees in the plan automatically; now, about 60% do.

Study after study has shown that participation rates rise -- often dramatically -- when employees are automatically enrolled in retirement savings plans. "Opt out rates, in most cases, are below 10%," says Jack VanDerhei, research director at the Employee Benefits Research Institute (EBRI.org). "So that's going from the typical 40% participation rate from younger and lower-income workers to almost 90% with automatic enrollment."

Why? Because it forces our natural sense of inertia to work for us, instead of against us. Under normal circumstances, we might not get around to signing up. With automatic enrollment, we might not get around to opting out.

Automatic Enrollment Has Pros And Cons

And you can, of course, opt out, as well as change your contribution amount (most plans start at 3% of your salary, and gradually increase the contribution by 1% each year). Even so, automatic enrollment has been a bit controversial. One of the pros, of course, is that you don't have to do a thing. Unfortunately, that's also one of the cons. Read on for tips on how to make this convenience work for you, rather than against you.

* Give it a chance. When you're automatically enrolled, you'll likely get a letter on your desk or in that thick stack of papers you get as a new employee. If you've never contributed to a retirement plan before, you may very likely balk at the idea. You just got a new job, you don't know how your salary will play out, you're barely making ends meet as is, you're coming off of a long lay-off, etc. Bottom line, it can be very easy to rationalize opting out of the plan. But instead, give it a go for a few months. You can always roll back your contribution amount later, or opt out completely if you find that you've re-prioritized your spending and you still can't afford to contribute a single dime. But I'm willing to bet that in most cases, you won't miss the money -- which is taken out pre-tax. And down the road, you'll be very grateful that you stuck with it.

* Contribute as much as you can. While automatic enrollment has done wonders for people who might not otherwise participate, high-income workers may settle for the default contribution amount when they could easily save more, says VanDerhei. "When they were forced to enroll on their own, these people would take much higher contribution rates. When contributions are defaulted, you find a much higher percentage just taking the default initial rate than you ever would have seen had it not been automatic." If your company's default contribution is 3%, and you can afford to contribute 5% or 7% or more until you hit the annual max -- $16,500 this year -- then by all means, do so.

* Don't let go of the reins. This sort of program is every bit as customizable as plans that force you to opt in, right down to your investment options. In a way, automatic enrollment takes you out of the game and puts you on the bench, meaning you don't have to make any major moves if you don't want to. But this is your retirement, not your employer's, and you need to take some responsibility and make sure that things are on track. VanDerhei says most plans will put your money into a lifecycle or target-date retirement fund, which I wrote about last week. "They'll automatically invest you in something that most investment professionals would agree to be age appropriate for you, and then rebalance for you as the markets change." You still need to check in at least once a year to make sure the fund is allocating your money the way you'd like it to.
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