Automate Savings With Automatic 401(k) Plans

May 22, 2008 By Debbie Dragon

More than a third of large companies in the United States are offering the automatic 401(k) savings plan as an employee benefit. The intention is that the automatic savings will help employees save despite the decline in Social Security benefits and struggling economy. There is also an automatic 403(b) retirement plan option for teachers and nonprofit organization employees.

Increase Contributions Each Year

One of the primary benefits of automatic 401(k) plans is the ability to increase the amount of your contributions each year – connected with your annual salary increase, for example. When you increase the percentage of money you contribute when you receive a raise, you won’t ever see the extra money in your take-home pay, and will never miss it.

In addition to contributing more to the plan over time, larger contributions will also reduce your tax liability, which is helpful as your earnings increase.

Professional Finance Advice

The automatic 401(k) option includes investment advice, typically with computer-generated portfolio, managed accounts, or target-date retirement funds. Some employers bring in financial advisors for employees at various times of the year, at no charge to the employee as an added benefit. It’s definitely a feature you’ll want to take advantage of, since seeing a personal finance advisor on your own can be expensive.

Disadvantages of Automatic 401(k) Plans

Despite a number of advantages of auto saving plans, there are some disadvantages as well. If employers set the initial savings percentages of 3% of each employees salary, some employees may just accept that and they may be able to (and should) save more as it’s recommended that individuals set aside 15% of their gross income (including any employer matching contributions) for retirement.

Additionally, many of the automatic plans will place employees into pre-selected investments- which may not be a bad thing though! Between 2002 and 2006, John Hancock compared employees who selected their own investments with those who invested in pre-selected plans, and found that after 5 years – the employees who selected their own plans would have been better off if they had been in the single life-cycle fund, instead.

Posted in financial plans, investing, personal finance, retirement planning, saving money