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What Is Automatic Enrollment?
Instead of being required to sign up to participate in your employer’s 401(k) plan after you become eligible (i.e., you’ve been with the com- pany for a designated period of time), a certain percentage of your paycheck—usually 3%—is deposited automatically in the 401(k) beginning on your eligibility date. You will receive a notice from the plan manager saying that you must notify them if you don’t want to participate.
Another feature employers are incorporating is automatic increases. If your employer includes this feature, your contribution rate will increase automatically each year, usually by 1%. Two very good things about a 401(k) are:
1. Employers often contribute matching funds to your 401(k), e.g., if you deposit 1% of your salary, your employer deposits a matching amount of money up to a defined maximum. This could double your savings because you are receiving a 100% return on your contribution before you even add in interest. If you’re lucky enough to work for a company that provides the benefit of a company match, it’s like getting free money. Even if the match is only 50 cents on the dollar, that’s still an instant 50% guaranteed growth. It would be hard to get that kind of growth anywhere else.
Each company has a “vesting” schedule. A vesting schedule looks something like this:
After 1 year of employment: After 2 years of employment: After 3 years of employment: After 4 years of employment: After 5 years of employment:
20% vested 40% vested 60% vested 80% vested 100% vested
This vesting schedule outlines how much of the company matching contributions and earnings on those contributions you own at any
Where Should I Save My Money? 63