If you’re an employee, chances are you already know what a 401k plan is and how it works. Well, the principal idea of a 401k plan is to help eligible employees contribute a percentage of their salary as part of their retirement plan.
When you elect to make contribution to your 401(k) account, a percentage of your paycheck on each pay period is automatically deducted before it can be taxed and invested in the company-sponsored 401(k) plan, allowing it to compound tax-free until until retirement.
In the event you change employers, your savings can be transferred to another tax-deferred retirement account. It can either be rolled over into a new 401(k) account by the new employer or roll the money over to an IRA or possibly rollover to Roth IRA.
However, while traditional 401(k) plans have proven to benefit the employees in many aspects, the sad truth is that when it’s up to them to take action, many of them don’t – especially the rank-and-file employees who are finding it more difficult to contribute.
In such event, the best choice might be to opt for automatic 401(k) enrollment. Instead of requiring workers to sign up (and make investment choices), employees automatically have a portion of their paycheck set aside for retirement. This has also been an effective way for many employers to increase participation in their 401(k) plans.
What is An Automatic 401(k)?
Unlike traditional 401(k), an automatic 401(k) is simply a retirement plan – sometimes called an opt-out plan, that automatically allows workers to take part in the plan unless they actively opt out of automatic contribution.
In other words, you will NOT participate in the auto 401(k) if you decline. If you’re silent, or taking no action, then you’re considered a participant by default.
In short, the core notion of automatic 401(k) enrollment is designed to recognize the power of inertia in human behavior and enlist it to encourage saving, instead of hindering it. Eligible workers are assigned a default contribution rate, usually between 3% and 6% of pre-tax wages, and a default allocation of funds contributed to their retirement account.
Nonetheless, in spite of the apparent benefits in raising 401(k) participation rates (quite dramatically), automatic 401k plan hasn’t been implemented widely yet these days. To some critics, automatic enrollment makes workers less responsible for their retirement decision, thinking that it is already taken care of.
Related 401(k) Articles:
- What is a 401k Plan? If you’re an employee, chances are you already know what a 401k plan is, but...
- 401(k) vs 403(b) Plan While 401(k) is a widely understood retirement plan and most understand how it works, very...
2010 Contribution Limits
The 401(k) contribution limit for is $16,500 for those under 50 years old. For anyone between the ages of 50 and 59 ½ years old you also have the option of contributing an additional $5,500 as a catch-up contribution.The IRA contribution limit for is $5,000 for those under 50 years old, with a $1,000 catch-up contribution option for those between 50 and 59 ½ years old.