New to A 401(k) Plan?

By: AnnaMarie Mock, CFP®

In 2006, the Pension Protection Act (PPA) was passed which introduced tax incentives for companies to adopt automatic enrollment and deferral increases. Since 2006, many plan sponsors have implemented automatic enrollment which was designed to positively influence employees’ behavior to improve their retirement savings.

Automatic Enrollment

Automatic enrollment is a common feature in retirement plans which allows an employer to “enroll” an eligible employee into the retirement plan starting at a specific deferral rate.

In tandem with automatic enrollment, the employer can increase the deferral rate through annual automatic savings increases up to a certain maximum. The employee always has the right to opt out of the plan completely or make adjustments to the deferral rate.

For example, Bob earns $50,000 a year and is now eligible to enter the employer’s 401(k) plan. The plan allows for automatic enrollment in the plan with a 3% deferral rate. If Bob does not opt out of the enrollment, Bob will be deferring $1,500 into the 401(k) plan (salary of $50,000 x deferral rate of 3%). The company automatically increases the deferral rate on an annual basis by 1%, so the following year, Bob will be deferring 4% or $2,000 of his salary into the plan.

According to Vanguard’s 2018 study, “How America Saves”, about 48% of Vanguard retirement plans adopted automatic enrollment, and about 66% of new plan participants were enrolled via automatic enrollments. Some 401(k) providers are expanding automatic enrollment to include existing eligible nonparticipants.

Employees of all ages need to take the steps necessary to have financial security in the future. Automatic enrollment moves beyond raising awareness of providing just information or educational programs to employees. This plan feature encourages employees to build inertia for retirement by getting involved with retirement savings and planning. By utilizing an employer retirement plan, an employee’s participation rate will naturally increase over time. Automatic transfers into an account helps to stay disciplined and build healthy habits around saving and spending less.

Company Match

Some companies offer a company match where they contribute a certain amount into the employee’s retirement plan account based on the amount the employee deferred and compensation.

There can be many variations, but a common example of a company match is 100% of the employee’s contributions up to 3% of annual compensation.

For example, Bob’s company has a 100% match up to 3% of annual compensation. Since Bob deferred 3% of his salary, he will get the full company match of $1,500. By automatically enrolling in the 401(k) plan, Bob was able to double his account balance in one year!

Keep in mind that saving for retirement coincides with your ability to pay for your current lifestyle expenses and saving for other goals. As you decide how much you want to defer, you should identify what your current lifestyle expenses are and quantify any short-term goals.

Saving in an employer retirement plan is intended for long term, retirement savings because it is not readily accessible.

If you have any questions pertaining to your 401(k) plan or goal funding, please reach out to the HIGHLAND team.

Author’s Bio

AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.