“Automatic” features in 401(k) Plans Help Employees Save for Retirement

“The question isn’t at what age I want to retire, it’s at what income.” These words of wisdom from boxing great, George Forman, are as timely today as they were when Forman was in the ring.

Most Americans need help saving for retirement. Too many place only 3% of their earnings into 401(k) plans, although experts recommend saving 10% or more. One retirement program feature that has proven effective in increasing employee participation is automatic enrollment. In contrast to some plans in which employees must elect to participate, automatic enrollment plans assume that employees want to participate; they are enrolled unless they notify their employer that they do not want to be enrolled. The automatic enrollment feature has significantly increased participation in retirement plans with some research showing participation levels at 82% compared to only 55% for programs without this feature.

Automatic enrollment is not, however, without potential drawbacks. Yes, it is good that more people are saving for retirement; but some employees enroll and forget about their retirement savings. Unfortunately the typical contribution rate of 3% of pay offered by employers is nowhere near sufficient to assure a comfortable retirement; it is merely a starting point. Employees need to not only enroll, but also recognize that they need to invest far more than the minimum required by their plan.

Some employers encourage employees to save more by creating automatic escalation clauses that provide annual increases in the employee minimum contribution. Most plans start at 3% of pay and an automatic escalation feature can gradually increase the annual contribution to as much as 6%. Some employers help employees even further by matching employee contributions, up to a limit.

Automatic rollover is another feature that can help retirement savers. Often when employees leave a company, their 401(k) accounts can be overlooked, creating a loss of funds for the employee and a bookkeeping burden for the company. With an automatic rollover feature, individual account balances can be automatically rolled over into an IRA. The employee continues to have an account that earns interest for retirement and the employer is relieved of the responsibility and administrative expense of tracking down former employees. FMi, for example, created a “FMi IRA” for plans worth $5,000 or less. The funds earn interest for the former employee; and the employer does not have to oversee the account or incur the expense of dealing with those who left the company. FMi, not the company, works with these individuals.

These automatic plan features not only help employees save for retirement, but also help employers reduce the costs associated with retirement plans. Plus, these features are seen as benefits that can be useful in retaining and recruiting talent.

Peter Macaluso, FMi Vice President, believes, “The biggest obstacle to retirement saving is getting enrolled into a plan, and automatic enrollment is a great beginning. Other automatic features such as auto escalation and auto rollover also help employees save for retirement; however employees must do more. They must recognize that reaching the age of 65 does not necessarily mean that they are ready for retirement. They must make additional contributions as early in their lives as possible and take advantage of retirement program features offered by employers.”

Your FMi representative can further explain these automatic plan features, as well as other retirement plan administrative services that FMi can offer to your company.

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