What Is an Automatic Enrollment Plan?
An auto-enrollment plan is a retirement savings plan in which employees are automatically enrolled to contribute a certain amount of their salary each paycheck. Auto-enrollment plans don’t require the employee to take action or to explicitly consent to participate in an employer-sponsored retirement plan. In such plans, the employer decides what percentage of the employee’s paycheck will automatically be placed in a retirement account – typically 3% - and also decides whether to increase that percentage each year.
As an example, let’s take company ABC and participant Jane. ABC Company has an automatic enrollment of 6%.
Jane becomes eligible for the plan on their next payroll date which is slated for March 1st. This means that on March 1st, if Jane has not made an update to her deferrals, she will have the 6% deducted from her pay to contribute into her retirement account.
But don’t worry, Jane has options and so do you.
Why Do Employers Decide to Adopt Automatic Enrollment?
Many employers choose to set up an automatic enrollment provision to their company’s retirement plan as a method to aid their employees to start saving for their retirement. Studies show that this has helped employees avoid missing enrollment periods and to contribute a higher percentage towards retirement.
How to Know If Your Plan Offers Automatic Enrollment?
Login to your Vestwell account. On the Homepage you will see the ‘I Am Saving…’ box, which shows your current deferral election. If you see a pre-selected amount listed then you are automatically enrolled in your plan.
You can also find about the auto enrollment specifics in your plan documents and notices under the 'Documents' tab, here you can find plan documents, program notices and investment comparison charts. Check out your 'Summary Plan Description' and 'Plan Highlights' for more information.
What Are Your Options?
With Automatic enrollment plans there are still options, you can choose which works best for you.
- Watch It Grow: Allow your preset deferral amount to grow, login at any time to check your current balance and transactions. Go into your 'My Vestwell' portal, select the 'Account' tab to review your holdings and performance.
- Change Deferral Amount: If the preset amount does not work for you change the deferral amount to whatever fits your budget. On the Vestwell home page under the 'I Am Saving' section, select 'Change Savings'; modify your Pre-Tax or Roth amount as desired and hit Apply Changes. You can choose to set deferrals in dollar amounts or percentages.
Please note: it may take one to two pay periods for this change to reflect.
- Opt Out: If you have decided that this is not the right move for you at moment you can select to opt out of the plan directly through the portal. On to the Vestwell home page under the 'I Am Saving' section, select 'Change Savings'; change the Pre-Tax and/or Roth amount to 0 and hit Apply Changes.
It's important to register and log in to your Vestwell portal to make sure that your retirement account is working the way you want it to. Make sure your deferral rate is set to a percentage or dollar amount that you are comfortable with.
Before you make that change, consider that even though saving might temporarily strain your budget, in retirement, you will likely need money. So we challenge you to take advantage of your retirement plan ) for at least a few months to see the impact. Even setting aside a small amount of your paycheck can add up and make a big difference in your savings when you’re ready to retire. In addition, if your employer provides a match, you will be gaining free money. Plus, your future self will thank you!
In the example below, an individual has a $45,000 gross annual income*. The blue area of the graph represents saving just 1% of pay over 40 years. The gold area represents a 1% starting contribution with a 1% annual increase until contributions reach 15% and contributions continue for 40 years, with a hypothetical rate of return of 7%.
*Note that the example above also includes an annual pay increase of 2%
While $118,910 may not provide a large amount of income in retirement, it could be a decent emergency fund for those unexpected expenses that your social security income won’t cover. But let’s look at the larger number; by increasing 1% until you are saving 15%, you could have $1,220,175 for retirement. That’s a big difference! Plus, if you are fortunate to have an employer match, you could have even more!
What Is Automatic Escalation?
If your plan is also set up with an automatic escalation feature, your deferral may be automatically increased annually.
The increase will occur on a date and by a percentage determined by your employer. Details are stated in your plan documents and your welcome package.
Automatic escalation stops when you have reached a predetermined percentage, which is also stated in your plan documents. This is another way for employers to help their employees try to achieve their retirement savings goals.