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Retirement Plans Go Automatic
Workers who are eligible to participate in a defined-contribution plan such as a 401(k) must take action to enroll and select one or more financial instruments for their portfolios. Unfortunately, many workers who intend to participate never follow through. To help boost participation rates and overcome workers’ procrastination, a growing number of employers have added automatic features to their retirement plans.

With auto enrollment, eligible employees are signed up automatically unless they opt out. Contributions are applied to a default financial instrument that provides diversification; it also features an allocation that adjusts as the participant ages and rebalances when values change. Diversification and allocation are methods used to help manage the financial instrument risk; they do not guarantee against loss.

The average initial contribution rate for auto-enrollment plans is only 3%, which may be too low for workers to fully benefit from an employer match, if one is offered. Plans that utilize auto escalation typically increase a worker’s contribution rate by one percentage point each year.

Pay Close Attention To Your 401(k) Plan

Regardless of whether your employer’s plan includes these automatic features, it might be wise to pay close attention to your options and take an active role in all the important decisions regarding your retirement dollars.

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Sources: Reuters, March 7, 2013; Science Magazine, March 8, 2013