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Automatic Enrollment Has Eyes Toward Your Future

You can thank your employer for providing you with the latest tools and equipment, but did you ever think of thanking him or her for automatic enrollment in your 401(k) plan?

While you’re at it, thank your employer for that “free money” too. Companies offer a 401(k) matching program as an employee benefit, under which they contribute a percentage of the amount you put into your account. That’s bonus money for sure, which will earn interest.

The Plan Sponsor Council of America reported about 62% of businesses with a 401(k) plan used automatic enrollment, up from 60% the year prior and 46% a decade ago, allowing an employer to divert a portion of your paychecks into a 401(k) plan, either immediately or after a few months, if you haven’t signed up voluntarily.

A Safe Harbor for Employers

To encourage more employers to adopt automatic enrollment, “safe-harbor” 401(k) plans include certain automatic enrollment features. For example, the percentage automatically withheld must apply uniformly to all employees covered by the plan and must not exceed 10 percent of salary.

Unless you make an election not to contribute or to contribute a different amount, any plan that allows elective salary deferrals, such as a 401(k) or SIMPLE IRA plan, can have this feature. Of course, your employer must give you the option, before any deferrals are withheld from your wages.

You may also have the option to withdraw your money within 90 days of the date that the first automatic contribution was made, depending on your employer’s plan. Generally, most plans deduct automatic enrollment contributions from an employee’s pre-tax wages and you don’t pay taxes on the contributions.

In addition, 401(k) and 403(b) plans that accept designated Roth contributions can specify that the automatic enrollment contributions are, in fact, designated Roth contributions, which means they’re deducted from your after-tax wages.

Building Beefier Retirement Accounts

That is the whole idea. Almost half of Americans and only 36 percent of non-retirees think their retirement saving is not on track, according to the Federal Reserve.

Non-retirees who experienced a layoff were less likely to have retirement savings but more likely to have borrowed from, even cashed out, these accounts in the prior year.

Younger adults were both less likely to have retirement savings and to view their savings as on track than older adults. At one point, 69% of millennials surveyed by the online lender Earnest were not saving for retirement. So, here is why it is important to be saving now for retirement if you are in this age group:

If you’re 30 years old making $40,000 a year and contributing 10% of your salary to a 401(k) plan with a goal to retire at 65, you’d have nearly $574,000 in your account in just 35 years.

If your employer offers a match of 50% of your contributions up to 6% of your salary, that balance will jump to over $745,000.

Although three-fourths of non-retired adults had at least some retirement savings, about one-fourth did not have any. This share was nearly unchanged since 2019.

Among those with retirement savings, these savings were most frequently in defined contribution plans, such as a 401(k) or 403(b), with 54 percent of non-retired adults having money in such a plan.

These accounts were more than twice as common as traditional defined benefit plans such as pensions, which 21 percent of non-retirees held. Forty-eight percent of non-retirees had retirement savings outside of formal retirement accounts.

The Savings Rate Must Be Sufficient

Some financial advisors and planners generally recommend people save at least 15% of their gross salary each year, which includes an employer’s 401(k) match.

In a Vanguard study, they found the common 6% likely isn’t a sufficient savings rate for most workers unless an employer also has a “very generous” match. So, employers have automated aspects of the plan to help boost savings rates and overall 401(k) participation.

Nearly 79% percent of plans with auto-enrollment use “automatic escalation,” a feature that gradually raises a worker’s savings rate over time, generally once a year and up to a maximum rate. That share is up from 75% in 2019 and 68% five years ago, according to CNBC.

At Hefren-Tillotson, we can help you make sense of it all. We’ve been doing it since 401(k) plans were initiated. And that says a lot. Contact us today. We would be glad to help.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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