Auto enrollment retirement plans offer employees incentives to save for retirement with contributions automatically taken out of their paychecks. However, the basic method of withdrawing a set amount could lead to workers saving less over time.
Automatic contribution enrollment allows employees to participate in the employer-sponsored arrangements. Workers can agree to a default percentage taken from their wages in the plans or they may choose a different amount,
according to the IRS.
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The enrollment plans are popular with 401(k) plans and may also be included in SIMPLE IRA plans, SARSEPS, 403(b) plans, and 457(b) government worker plans. The plans often deduct pre-tax wages so the money is not taxed as the employee works but is subject to taxes when they begin withdrawing money during retirement. Some plans also include Roth IRAs, which deduct after-tax money that is not taxed when withdrawn during retirement.
Employees may benefit from having set amount withdrawn from their wages for retirement, but they may not focus on their individual needs to contribute more. A Vanguard analysis of 2,000 401(k) plans among 3 million participants found the average savings rate for those with automatic enrollment was 6.6 percent compared with a 7.5 percent rate for employees in voluntary
enrollment plans, U.S. News & World Report noted.
Retirement savings may not be enough for some employees when they are automatically enrolled in a plan that offers particular investments. Target-date funds, often used in the plans, invest in stocks with some risk but change to conservative investments as the worker nears retirement. However, these types of investments might not fit particular workers, who could be building their retirement savings faster with investments that fit their specific needs.
Some employers may not set up adequate amounts deducted to meet employees’ needs. A 2014 analysis by Vanguard found a 50 percent increase in automatic enrollment plans over five years, but more than 60 percent of the plans took 3 percent or less of employees’ pay, when Vanguard recommends a total of 12 percent to 15 percent retirement savings that include employer matching funds,
The Wall Street Journal reported.
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