Why Being “Auto-Enrolled” in Your Retirement Plan Isn’t Enough to Retire

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Key Takeaways:

1. Auto-enrollment is a starting point, not a complete retirement strategy. Being automatically enrolled in your employer’s retirement plan can help you begin saving, but the default contribution rate may not be enough to meet your long-term retirement needs.

   
   

2. Your contribution rate matters. If you were automatically enrolled at a relatively low rate, such as 3%, it can be easy to assume you're doing enough simply because you're participating. Reviewing your savings rate and increasing it over time can help you make greater progress.

3. A small increase can make a difference. Even increasing your contribution by 1% or 2% can put more of your income toward retirement. The important step is to review your current rate and make sure it reflects where you are trying to go.

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Auto-Enrollment Made Saving Easier. But Is It Enough?

Saving for retirement used to require employees to take the first step themselves: enrolling in their employer's retirement plan, choosing how much to contribute, and selecting their investments. Auto-enrollment has changed that.

Today, many employers automatically enroll eligible employees in their retirement plans. Instead of having to initiate the process, employees may begin contributing automatically when they become eligible. That's a meaningful improvement.

Auto-enrollment can remove one of the biggest barriers to retirement saving: simply getting started. But there's an important distinction between being enrolled and being on track. If your plan automatically enrolled you at a 3% contribution rate, for example, you may see money coming out of every paycheck and feel like you've checked the retirement savings box. But 3% may not be enough to support the retirement you're envisioning.

Auto-enrollment gets you started. It doesn't necessarily tell you how much you need to save.

The Default Rate Isn't a Personal Recommendation

One of the easiest mistakes to make with auto-enrollment is assuming that the default contribution rate was selected specifically for you. It wasn't.

The default rate is a plan design decision. Your employer and plan's design may determine how much automatically goes into your account when you're enrolled. That rate might be 3%. It might be higher. Some plans also automatically increase contributions over time. But regardless of the default, it is important to remember that the default isn't necessarily your ideal savings rate.

Your retirement needs depend on factors that are specific to you, including:

• Your current age

• When you expect to retire

• Your current retirement savings

• Your income

• How much you're already saving

• Your expected retirement spending

• Other sources of retirement income

Two employees who are automatically enrolled at the same contribution rate could have very different retirement needs. That's why it is worth looking beyond the percentage selected for you.

Participation Is Only Part of the Picture

Imagine two employees are automatically enrolled at 3%. Both are participating in their employer's retirement plan. On paper, they are doing the same thing. But participation alone doesn't tell you whether either employee is making enough progress toward retirement.

Someone who starts saving at 25 and receives regular contribution increases over several decades has a very different retirement outlook from someone who starts saving at 45 and remains at the default rate. This is why retirement planning requires more than asking: “Am I participating?”

A better question is: “Am I saving enough for the retirement I want?”

Don't Get Stuck at the Default

The good news is that changing your contribution rate is often simple. Log into your retirement plan account and look at your current contribution percentage. If you're at the default rate, consider whether it makes sense to increase it. Even a 1% or 2% increase can be a meaningful step.

You don't necessarily have to make one large adjustment. Instead, you can build the habit of increasing your savings gradually as your income and circumstances change. Some retirement plans also offer automatic escalation, which gradually increases your contribution rate over time. If your plan offers automatic escalation, take a moment to understand how it works and whether you're enrolled.

Don’t Assume: Are You Actually Enrolled in Your Employer’s Retirement Plan?

Not all companies offer automatic enrollment, and many employees miss out on this critical benefit simply because they assume they’re already signed up. Here's how to check if you’re enrolled and what to do if you're not.

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Put Your Raises to Work

One of the easiest times to increase retirement savings is when your income increases. If you receive a raise, consider directing part of that increase toward your retirement account rather than allowing your entire raise to become additional spending.

For example, suppose you receive a 3% raise. You could increase your retirement contribution by 1% while still keeping the remaining increase in your paycheck. Over time, these incremental increases can help your savings rate move well beyond the original default.

Some retirement plans also offer automatic escalation, which gradually increases your contribution rate over time. If your plan offers this feature, understand how it works and whether you are enrolled.

Your Contribution Rate Isn't the Only Number That Matters

Increasing your contribution rate is an important step, but it's not the only thing worth reviewing. You should also understand:

How much have I already saved?

Your current account balance provides a starting point for thinking about your retirement outlook.

When do I want to retire?

Retiring at 60 requires a different savings timeline than retiring at 67 or 70.

How are my investments allocated?

Your investment choices can affect how your retirement savings may grow over time and how much risk you're taking.

How much might I need in retirement?

Your retirement income needs will depend on your lifestyle, expenses, healthcare costs, other sources of income, and the age at which you retire.

That's why simply increasing your contribution rate doesn't answer every retirement question.

A Simple Step You Can Take Today

You don't need to completely rethink your retirement strategy today. Start with one question: What percentage of my paycheck is currently going into my retirement plan?

Then ask: Is that rate appropriate for my retirement goals and timeline?

If you haven't looked at your contribution rate recently, log into your retirement plan account and check. If you're still at the default rate, consider whether increasing your contribution by 1% or 2% is a step you can take now. You can always revisit the decision later as your income, expenses, and retirement goals change.

Don't Forget the Rest of Your Plan

Your contribution rate is important, but it is only one part of your retirement picture. Your investments, employer contributions, retirement timeline, and expected retirement income all play a role as well.

For example, two employees contributing the same percentage could have very different outcomes based on their starting age, account balance, employer contributions, investment choices, and expected retirement date.

That's why reviewing your retirement plan periodically can be valuable. Your retirement plan isn't a "set it and forget it" account. As your career and financial circumstances change, your retirement savings strategy may need to change with them. If you’re curious to know if you’re on track to retire, you can use our retirement readiness checklist to think through some of the key areas that may affect your transition into retirement: Are You Retirement Ready? Checklist.

Auto-Enrollment Is a Safety Net, Not the Finish Line

Auto-enrollment has made it easier for employees to begin saving for retirement. But getting enrolled is just the first step. If you've never reviewed your contribution rate, take a few minutes to find out where it stands. 

Your retirement plan should reflect where you're trying to go, not simply where your employer's default settings started you. At RetireAdvisers℠, we provide educational guidance to help you better understand your employer-sponsored retirement plan and the decisions that may affect their retirement.

If you're unsure whether your current contribution rate makes sense for your retirement goals, a RetireAdvisers℠ meeting can be a useful place to start. We can help you understand your retirement plan, review the resources available through your plan, and talk through questions you may have about preparing for retirement.

The concepts expressed herein represent the views and opinions of Pension Consultants, Inc., and are not intended as legal, tax, or investment advice for any specific individual, account, or plan.