PERSONAL FINANCE - This 401(k) plan hums along on autopilot - It's a new way to push saving for retirement: automatic enrollment with no investment decisions required.
If you're lucky enough to have the newest kind of 401(k) plan, experts say you're off to a good start even if you don't lift a finger.
The hot trend in retirement savings plans is making the 401(k) run on autopilot. Employees are enrolled automatically. The plan decides how much you should contribute and simply takes the money out of your paycheck.
How your money is invested is also decided for you. And your contribution amounts and investment allocation automatically change over time. You can tweak those decisions -- as you can with a traditional 401(k) -- or even opt out of the plan entirely. But if you don't do anything, you're still probably better off than if you didn't enroll.
"These plans are designed to make a lot of the right decisions for the worker," said Jon Dauphine, director of economic security strategy at retiree group AARP in Washington. "Even if inertia rules and the employee doesn't do anything, they'll still be in a plan that gives them a good outcome."
Until last year, few employers had automatic 401(k)s because companies were afraid they could be held liable if workers didn't save enough or invest well enough to meet their retirement needs. The Pension Protection Act of 2006 changed that by creating "safe harbors" -- guidelines for automatic 401(k)s that employers could use to help protect themselves from liability.
As a result, 40% of employers that don't yet have automatic 401(k)s say they plan to implement them, Dauphine said.
The plan guidelines are widely considered to be a good start for workers who otherwise would not have participated.
Companies that offer automatic enrollment rave about it for a variety of reasons: It vastly increases participation rates, with more than 85% of all eligible workers -- sometimes more than 95% -- enrolling compared with about 70% in plans that use traditional "opt in" enrollment. Workers in automatic 401(k)s also are more satisfied with their plans and are likely to save a higher percentage of their pay, according to a survey.
Plus, participants in automatic 401(k)s are now more likely to have an appropriate mix of investments in their accounts. Before the 2006 pension law was enacted, if you didn't decide how to allocate your assets in an automatic-enrollment plan, your money was likely to go by default into a super-safe but low-yielding fixed-income investment such as a money market fund -- not the best place for your savings if you have a ways to go before retirement.
