Q: My new employer auto-enrolled me in their 401(k) plan. This means that my retirement savings are taken care of, right?
Many 401(k) retirement plans have auto-enrollment features. That is, when a new employee is hired, he or she is automatically enrolled in the plan and money is withheld from the employee's paycheck to be contributed into their account.
The main problem with auto-enrollment is that the default contribution rate tends to be rather low.
To be fair, having some retirement savings is certainly better than having none at all. However, if your plan's default contribution rate is too low, it's unlikely to build up enough retirement savings for you. In this way, auto-enrollment can give employees a false sense of security -- they think they'll have enough to retire on, but with a low contribution rate, it's unlikely.
More than one-third of plans with auto-enrollment have default contribution rates of 3% or less, which may not even be enough to take full advantage of the employer's matching contributions. And virtually all have default rates of 7% or less.
Meanwhile, most financial planners recommend saving at least 10% of your income for retirement, not including employer matches.
Not all plans have woefully low contribution rates. Many have an auto-escalation feature, where the default contribution rate starts low but increases automatically every year. And, many are auto-enrolling participants at a 6% rate, not the long-standard 3% rate.
The bottom line is that depending on your specific plan, auto-enrollment by itself may or may not be enough. Check your plan's contribution rate. If it's too low, it's a smart idea to increase it as soon as possible.
