Automatic Investment Plan: How it Works, Different Types

What Is an Automatic Investment Plan (AIP)?

An automatic investment plan (AIP) is an investment program that allows investors to contribute money to an investment account at regular intervals to be invested in a pre-set strategy or portfolio. Funds can be automatically deducted from an individual's paycheck or paid out from a personal account.

Understanding Automatic Investment Plans (AIPs)

An automatic investment plan is one of the best ways to save money. Numerous market mechanisms have been devised to help facilitate automatic investment plans. Investors can contribute through their employer by scheduling automatic deductions from their paycheck for investment in employer-sponsored investment accounts. Individuals can also choose to set up automatic withdrawals from a personal account.

Employer-Sponsored Automatic Investment Plans

Employers offer various options for automatic investing through their benefits programs. Investment options help to support both short-term and long-term investment goals for employees. The most common investment vehicle for employer-sponsored automatic investing is a 401k. Employees can choose to automatically invest a percentage of their paycheck in an employer-sponsored 401k. Many employers will often match a percentage of their employees' automatic investment as part of their benefits program.

Companies may also offer additional options for automatic investing, such as company stock or Z-shares at a mutual fund company. These automatic investing options help to promote loyalty and long-term tenure.

Additionally, some companies may partner with financial firms through their benefits program to offer other options for automatic investing. These partnerships can support short-term investing goals and holistic financial planning. Benefit program partnerships may allow for automated investing in customized investment accounts or to an account that is managed by a roboadvisor.

Automatic Investment Plans for Individuals

Outside of employer-sponsored automatic investment plans, individuals also have a wide range of options to choose from in the investment market. Nearly every available investment account offering provides investors with the option to make automatic investments.

Some of the most common investment accounts for making automated investments include retirement accounts and brokerage accounts. Some retirement accounts offer incentives for investors to make automated investments. Many investing platforms also offer options for electing to save automated investments in a money market account, earning interest until the money is allocated to other types of securities.

One form of AIP that helps grow investments in a single stock is a dividend reinvestment plan (DRIP). A DRIP is a program that allows investors to automatically reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. Although the term can apply to any automatic reinvestment arrangement set up through a brokerage or investment company, it generally refers to a formal program offered by a publicly traded corporation directly to existing shareholders.

Automatic Investing with Roboadvisors

In the fast-growing fin-tech market, many new options for automated investing are also being introduced called roboadvisors. Fintech companies offer micro-investing platforms that allow investors to make automatic investments in small increments. Acorns provide one example. The platform connects with an investor's bank account to invest spare change (round-ups) from each purchase in an elected investment portfolio. Wealthfront and Betterment are two other well-known roboadvisor platforms.

Robo-advisors, for the most part, automate indexed strategies intended for long time horizons. They tend to follow passive investment strategies informed by modern portfolio theory (MPT) to optimize asset allocation weights to maximize expected return for a given risk tolerance and then keep those portfolio weights balanced.

What makes roboadvisors unique is that they are ultra-low-cost and have very low minimums to get started—meaning that even beginners can get optimized portfolios with small dollar amounts. They are also set-it-and-forget-it in many ways, meaning that it is truly automatic.

Automatic Investment Plan Advantages

There are numerous techniques and market products available for investors interested in making automatic investing contributions. Investors making automatic investments through an employer-sponsored benefits program will also typically save money on transaction costs and experience lower fees.

By "paying themselves first," many people find they invest more in the long run. Their investments are treated as another part of their regular budget. It also forces a person to pay for investments automatically, which prevents them from being able to spend all of their disposable income.