Q: My employer started taking money out of my paycheck, without my permission, and putting it in a 401k. Is this legal?
A: Sounds like you’re having a negative reaction to a negative election. The negative election, also known as automatic enrollment, is a perfectly legal retirement plan provision. The provision works by automatically enrolling workers in their company retirement plan, UNLESS the employee opts out.
As underhanded as it may sound, automatic enrollments are introducing many employees to a concept that is unfortunately foreign – the concept of saving.
According to the Investment Company Institute, less than 30 percent of workers in their 20s, earning between $20,000-$29,000, participate in a 401k plan. Adding automatic enrollment increases that participation rate to nearly 91 percent.
Some might say the numbers reflect the captive audience. But remember, employees can always opt out.
I would suggest that automatic enrollment simply counteracts the laws of inertia to the extent that a savings plan in motion tends to stay in motion. Unfortunately, the typical automatic enrollment is only at 3 percent of pay, when a savings rate of 10-12 percent is needed to address a future retirement.
So, I would suggest that you accept what your employer has done for you and find a way to save even more. Meanwhile, be sure to take a look at the investment option that was chosen for you as it is probably quite conservative. A little attention to your savings rate and investments, and you might find yourself at the front end of a bona fide retirement plan.
Make sure you stop by your human resource department tomorrow and say “thank you.” Without automatic enrollment, you might have never started to save for retirement.
D. DRUMMOND OSBORN, CFP is a Certified Financial Planner and Director of Wealth Management at Osborn Wealth Management, a Registered Investment Advisor, where he focuses on investment management, financial planning and trust advisory services. Visit him on the web at www.osbornwealthmanagement.com or e-mail him your questions or comments at drummond@osbornwealthmanagement.com.
