There used to be a time where you had to go to the Human Resources department and fill out the forms to enroll in your company-sponsored retirement plan. You’d be given a binder of the plan rules, investment choices and what seemed like a mountain of paperwork. While online portals have made the enrollment process much easier, a little more than 60% of employers offer automatic enrollment in their plan.
Many 401(k) plans have basic policies that generally state an employee will be automatically enrolled at a specified percentage of the employee’s salary, which will be deducted from each paycheck, unless the employee opts out of the plan. Like most plans, employees also have the option to defer more of their salary and change the default investment option. This practice significantly increases the participation rate while helping individuals save for their retirement.
For employees, this feature appears to be a no-brainer. Without lifting a finger, they are reducing their taxable income with pre-tax contributions, they are saving tax deferred for retirement, and they are likely receiving the employer matching contribution if there is one. However, this should not be where your attention ends. No investment is “set it and forget it.”
First, understand how much you are contributing to your retirement savings and determine if it is enough for you to meet your goals. Most employers set a contribution rate around 3% of an employee’s salary. This may also be less than the amount needed to receive the full match. For example, a typical company match may be dollar for dollar on the first 3%, then 50% per dollar up to a specified percent. By sticking with the default enrollment percentage, you could be missing out on free money by not contributing up to the amount offered through a company match. Conventional wisdom suggests you should save 10% to 15% of your salary; however, how much you need to save depends on how much you have accumulated, how much you spend, how close to retirement you are and many other factors unique to you.
Secondly, you need to take a close look at the default investment option for your plan. 401(k) plans are required to offer a qualified default investment for participants who do not provide an investment election. Your employer has a fiduciary duty as sponsor of the plan; therefore, the default investment option is often conservative with the primary goal of preserving your capital. Employers are also allowed to choose lifecycle funds or target date funds where the asset allocation within the fund is based on the employee’s age, projected retirement date or life expectancy.
For example, at age 45, your target retirement date is likely near 2040 while your 25-year-old coworker may be automatically enrolled in a fund with a target retirement date near 2060. Each target date fund is constructed differently, but generally, the mix of investments in the target date fund becomes more conservative as the expected retirement date grows closer. However, the mix of fixed-income and equity investments may be too conservative for your situation. These funds only consider your age, not your need for your assets. Your need for fixed investments may be considerably less depending on how much you have saved and your spending patterns. We recommend having only money you need within the next 10 years invested in fixed-income investments to preserve capital. Money not needed within the next 10 years should be invested for growth.
Overall, automatic enrollment in your company-sponsored retirement plan is a solid start if you are focused on learning your new job and environment. However, your retirement savings should not be left on autopilot for long. Your savings rate and investments should be reviewed at least once a year to ensure you are on track to meet your goals.
If you’d like help with your retirement investments, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
