Many employers now automatically enroll their employees in the company’s 401k plan at 3% of their pay. This effectively creates a forced retirement savings plan by the employee, which is a big part of what automatic enrollment seeks to accomplish. But one of the criticisms of this system is that it effectively takes the employee out of his own retirement planning, under the assumption that the company has his retirement covered. As an employee, should you rely fully on the contribution level set by your employer? Or should you take a more hands on approach?

What is Automatic 401k Enrollment?

The Pension Protection Act of 2006 gave employers authority to automatically enroll employees in their company-provided 401k plans. Employers have responded by automatically enrolling either all of their employees or all newly hired ones. Participation is by default—either the employee specifically opts out of the plan, or enrollment will be automatic. Making your retirement contributions automatic helps you avoid having emotions take over when the stock market goes up and down.

In a fashion not unlike traditional pensions of old, automatic enrollment largely removes retirement planning from the employee. The employer can choose not only the percentage contributions to the plan, but also the types of investment the plan contains. Most large employers are set up for automatic enrollment. Participation, however, falls considerably for small and mid-sized employers.

When increasing your contribution makes sense

Automatic enrollment is something of a default setting—a minimum contribution level. But there are times—many of them—when you should look to go beyond the minimum.

A 3% contribution won’t come close to funding your retirement. We can say that any retirement contributions are better than none at all—which is the basic idea behind automatic enrollment—but let’s be honest, 3% won’t buy much of a retirement. 401k’s can be very lucrative investment vehicles but only if you can contribute as much as you can comfortably afford.

You’re not comfortable managing your retirement savings. If you don’t like to manage your own investments, or don’t feel you have the ability, you’ll want to put as much as possible into your 401k—to be managed by others.

You have no other investments, retirement or otherwise. Much like home ownership, automatic contributions to a 401k are a form of forced savings. If you don’t have much of a track record at saving money, then by all means, increase your 401k contribution.

The company offers a more generous match for higher contributions. Generally speaking, you should contribute a large enough percentage of your income that you max out the company 401k match. You may be satisfied with a 3% contribution if the company match tops out at 3%, but if a 6% contribution gets you a 6% match, then that should be the goal.

You’re in the higher income tax brackets. If you’re marginal income tax rate is 10% or 15%, the size of your 401k contribution may not make a huge difference. But if you’re in the 28% bracket or higher, you should do your best to maximize your contributions.

Why you might reduce your contribution or even opt-out completely

Contribute less than 3%? Yes—or maybe opt out altogether. In some cases, this will make abundant sense.

The company match maxes out at less than 3% or doesn’t exist. The real attraction of a 401k plan for many is the company match. It’s an instant return on your investment. But if the company match tops out at a contribution of just one or two percent, there may be no motivation to contribute any more than this. If there is no company match, you might decide to opt out.

You want to actively manage your own retirement assets. One of the constraints of automatic enrollment is the prospect of limited choices and preset investment combinations. Investment or employer matches in company stock can be another sticking point. If you want to manage your own investments—and you have a solid track record at it—you’ll probably be better off with an IRA or Roth IRA.

You have substantial non-retirement investments.

If your retirement doesn’t hinge on a well funded 401k, you may not want to keep your money tied up in one for years. Once again, an IRA or Roth IRA might be a better fit in your situation.

You have large debts to pay. It can be counter productive to accumulate savings for a retirement that’s 20, 30 or 40 years away if you’re drowning in debt today. Get your debts under control, then revisit your 401k options.

You generally don’t pay income taxes. About 50% of U.S. households pay no income tax at all; how unfortunate it would be to have 401k distributions subject to taxation at retirement when no tax savings ever came on the contributions. If your employer is one of the few that offers a Roth 401k, you might consider that option instead.

Never forget that retirement is primarily YOUR responsibility

Even though automatic 401k enrollment bares some superficial resemblance to old fashioned defined benefit retirement plans—where the employee had to do nothing—it’s important to remember that they aren’t! They remain defined contribution plans, which means that the success of the plans still depends largely on how much you put into them. A contribution rate of 3% probably won’t work for most people in the long run, so even though that’s the level the company offers automatically, you still need to consider what your needs will be and adjust accordingly.

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