The Pros and Cons of Automatic 401(k) Enrollment

A 2006 law designed to increase retirement savings is allowing companies to auto-enroll employees in 401(k) plans at a lower contribution rate than they would normally contribute on their own. Did the law result in more negative effects than positive? Here are the pros and cons:

Pros of Auto-Enrollment

  • 18% more people
  • Since more people are using 401(k) programs, the overall collective amount saved is higher
  • You are allowed to automatically increase you contribution amount every year
  • You could be eligible to contribute additional pre-tax savings if you are 50 or older
  • More people have a chance to save who wouldn’t have normally signed up

Cons of Auto-Enrollment

  • Assigned low savings rate, lower than employees would have picked
  • If an employee thinks the savings rate is too high, they will opt out
  • Company cost-cutting with match contributions by using lower automatic savings rate
  • Makes employees think everything is taken care of, and they don’t have to be involved with retirement goals and planning
  • Average contribution rates have declined

To read more about automatic 401(k) enrollment, visit Daily Finance.